Table of contents

Introduction 3

Types of Mergers 3

Types of Acquisitions 4

Motives behind M&A 5

Problems faced in Mergers and Acquisitions 6

Problems faced in Cross Border Mergers and Acquisitions 7

Sony's Acquisition of Columbia Pictures 8

Sony 8

Columbia Pictures 9

Analysis: Star Framework 9

Fig: Choice of Entry Mode 15

Failure of the Acquisition 15

Reasons for the Failure 16

Merger between Daimler-Benz and Chrysler Corporation 18

Daimler-Benz 18

Chrysler Corporation 18

Analysis: Star Framework 19

Reasons for the Merger 22

Failure of the Merger 23

Reasons for failure 23

Culture Clash 23

Mismanagement 25

Literature Review 27

Conclusion 29

Introduction

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and merging of different companies.

A purchase deal will be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

Types of Mergers

� Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.

� Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

� Market-extension merger - Two companies that sell the same products in different markets.

� Product-extension merger - Two companies selling different but related products in the same market.

� Conglomeration - Two companies that have no common business areas. There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

� Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable. Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

� Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

Types of Acquisitions

An acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing

another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares. Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.

Motives behind M&A

These motives are considered to add shareholder value:

� Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.

� Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices.

� Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts. Or, a manufacturer can acquire and sell complementary products.

� Synergy: Better use of complementary resources.

� Taxes: A profitable company can buy a loss maker to use the target's tax write-offs. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

� Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders (see below).

� Resource transfer: resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

� Vertical integration: Companies acquire part of a supply chain and benefit from the resources.

� Increased Market share, which can increase Market power; in an oligopoly market, increased market share generally allows companies to raise prices. Note that while this may be in the shareholders' interest, it often raises antitrust concerns, and may not be in the public interest.

These motives are considered to not add shareholder value:

� Diversification: While this may hedge a company against a downturn in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their portfolios at a much lower cost than those associated with a merger.

� Overextension: Tend to make the organization fuzzy and unmanageable.

� Manager's hubris: manager's overconfidence about expected synergies from M&A which results in overpayment for the target company.

� Empire building: Managers have larger companies to manage and hence more power.

� Manager's Compensation: In the past, certain executive management teams had their payout based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse incentive to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders); although some empirical studies show that compensation is rather linked to profitability and not mere profits of the company.

Problems faced in Mergers and Acquisitions

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete. Flawed Intentions For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit. A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later. On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook

uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world. Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.

Companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.

Problems faced in Cross Border Mergers and Acquisitions

Cross Border Deals are the inherently more challenging considering the melding country cultures, communicating across long distances, dealing with misunderstandings arising from different business norms, and even fundamental differences in management style.

Why are cross-border mergers and acquisitions so difficult to implement? Consider all that must go right in any (same-country) acquisition: The two companies must reach agreement on which products and services will be offered, which facility or group will

have primary responsibility for making this happen, who will be in charge of each of these facilities or groups, where will the expected cost savings come from, what will the division of labor look like in the executive suite, what timetable to follow that will best generate the potential synergies of the deal, and myriad other issues that are complex, detailed, and immediate. On top of all this the merging companies must continue to compete and serve their customers in a competitive marketplace.

Now, take all these challenges, and add a completely new set of problems that arise from the fundamental differences that exist across countries. Consider, for example, for all the similarities that a global imperative places on companies, the very real differences in how business is conducted in, say, Europe, Japan, and the United States. These differences involve corporate governance, the power of rank and file employees, worker job security, regulatory environments, customer expectations, and country culture � all representing additional layers of complexity that executives engaged in cross-border M&As must manage.

Sony's Acquisition of Columbia Pictures

Sony

Sony Corporation is a Japanese multinational corporation and one of the world's largest media conglomerates with revenue of $68.39 billion (as of 2006) based in Minato, Tokyo. Sony is one of the leading manufacturers of electronics, video, communications, video games, and information technology products for the consumer and professional markets.

Sony Corporation is an operating-holding company. It is the electronics business unit and the parent company of the Sony Group, which is engaged in business through its 5 operating segments �electronics, games, entertainment (motion pictures and music), financial services and other. These make Sony one of the most comprehensive entertainment companies in the world. Sony's principal business operations include Sony Corporation (Sony Electronics in the U.S.), Sony Pictures Entertainment, Sony Computer Entertainment, Sony BMG Music Entertainment and Sony Financial Holdings.

Columbia Pictures

Columbia TriStar Motion Pictures Companies is part of Sony Pictures Entertainment Inc. (SPE), a global operation involved in motion picture production and distribution, television programming and syndication, home video distribution, and several other areas of the entertainment business. As the motion picture segment of SPE, Columbia TriStar held an average of 17 percent of the domestic box office market between 1990 and 1995, producing such popular films as Sleepless in Seattle, A Few Good Men, Philadelphia, and In the Line of Fire. Under the Sony Corporation corporate umbrella, Columbia TriStar Motion Picture Companies consisted of the popular film companies Columbia Pictures and TriStar Pictures; Sony Pictures Classics, a company specializing in acquiring, marketing, and distributing foreign and independent films; Triumph Films, specializing in films that further diversified SPE's motion picture roster; and Columbia TriStar Film Distributors International, which focused on the distribution of SPE's motion pictures.

Analysis: Star Framework

The ultimate purpose of this framework is to understand how companies can optimize the activities in their value chains while transacting globally in terms of three parameters:

1. Activity architecture

2. Locational competencies

3. Global coordination

Now, let us try to understand the profile of all the companies with the help of this framework.

1. Activity architecture

Sony was into the development of the transistor, the cassette tape, and the pocket-sized radio by 1957. In 1955, it produced Japan's first transistor radio and in 1960, it produced world's first transistor television. The joint venture of Sony and CBS Records became the largest record company in Japan after 1967. In the 1970s, Sony developed and introduced the Walkman, which was a huge success. In 1974, the more expensive Betamax (home videocassette recorder) failed despite its technological advantages because of the less expensive VHS of Matsushita subsidiary JVC. The Walkman boosted Sony's sales significantly during the 1980s. In 1982, it invented and started selling CDs. It just started establishing its business in the industry before the acquisition.

2. Locational competencies

Japan was a favourable location in terms of technology. This proved to be beneficial for Sony whose mission was innovation through its products.

3. Global Coordination

Sony's decision to enter global markets took roots during Morita's visit to Royal Philips Electronics plant in Holland in 1953. During the mid-1960s, Sony entered the European markets. In the 1970s, Sony also set up manufacturing units in the US and Europe. By the mid-1980s, Sony's consumer products were marketed in Europe through its subsidiaries in the UK, Germany and France. Morita's strong desire to own a movie production studio to support Sony's electronics business, led to the acquisition of Columbia in 1989. Though Sony had also been in negotiations with the management of other top Hollywood studios such as Paramount, MCA/Universal and MGM, it finally decided to acquire Columbia pictures, which unlike other studios, had retained rights to its entire film library and 2,700 movie titles.

1. Activity Architecture

Columbia was the film and television production company. Though the product was mostly low-cost westerns, serials and action pictures, Columbia gradually built a reputation by attempting higher-budget fare. Helping Columbia's climb was the arrival of an ambitious director named Frank Capra. Between 1927 and 1939, Capra became Columbia's biggest asset, gaining in confidence and constantly pushing Cohn for better material and bigger budgets. The Howard brothers and Larry Fine made more than 180 shorts for Columbia between 1934 and 1958. Also that year Columbia began producing a series of cartoons under the Screen Gems name.

The Screen Gems name would be used often; in the late forties it was revived for a television-commercial production unit; this expanded over the next few years into a full-fledged television-series production house, offering Father Knows Best, The Donna Reed Show, Bewitched, I Dream of Jeannie and The Monkees. In the late 1990s, the Screen Gems name was revived again as a label for low-budget horror and suspense films. By the time of World War II, Columbia had reached maturity. Propelled in part by the attendance surge during the war, the studio also benefited from the popularity of its discovery and biggest star, Rita Hayworth. As the larger studios declined in the 1950s, Columbia took the lead, continuing to produce forty-plus pictures a year, offering adult fare that often broke ground and kept audiences coming to theaters. While he was widely disliked, even feared, few would argue that Harry Cohn had not done a superb job in building Columbia Pictures.

Following his death in 1958, Columbia went through a period of drifting; though there were still important films, the momentum, as well as the mass audience, was gone. By the late 1960s, Columbia was a schizophrenic place, offering old-fashioned fare like A Man for All Seasons and Oliver! while also backing the more contemporary Easy Rider and The Monkees. Columbia Pictures Corporation was renamed to Columbia Pictures Industries, Inc. in 1968. Nearly bankrupt by the early 1970s, the studio was saved only by the direst methods; the Gower Street studios were sold, and a new management team brought in. While fiscal health was restored through a careful choice of star-driven vehicles, the studio's image was badly marred by the David Begelman check-forging scandal. Begelman eventually resigned (later ending up at Metro-Goldwyn-Mayer), and the studio's fortunes gradually recovered. In December 1987, Columbia Pictures bought their venture shares and merged Columbia and Tri-Star into Columbia Pictures Entertainment. The volatile film business made Coke shareholders nervous, and following the box-office failure of Ishtar, Coke spun off its entertainment holdings in 1987, creating a stand-alone company called Columbia Pictures Entertainment Inc.

2. Locational Competencies

The biggest advantage was America being the abode of Hollywood. Also, the media industry was on a roll during 1980s, especially the TV industry.

3. Global Coordination

With a healthier balance-sheet, Columbia was bought by Coca-Cola in 1982. Under Coke, Columbia acquired Norman Lear and Jerry Perenchio's Embassy Pictures, mostly for its library of highly successful television series. Expanding its television franchise, Columbia also bought Merv Griffin's game-show empire, which included rights to Wheel of Fortune and Jeopardy!. Recognizing the importance of the overseas market, in 1986, Columbia recruited British producer David Puttnam to head the studio. He alienated the film-production community upon his arrival by denouncing Hollywood's taste for froth and the light-weight.

In the light of the above information, we come up with the following ratings:

Star Framework

Parameters Sony Columbia

Activity architecture C B

Locational competencies B A

Global coordination C D

Rating

A Best in the industry Ideal

B Above Average Good

C Industry Avarage Satisfactory

D Below Average Poor

F Worst in industry Totally unsatisfactory

Reasons for the Acquisition

Sony's vertical integration is unique because few media conglomerates have been integrated lie Sony's hardware and software segments. Most media conglomerates are horizontal integrations or simple conglomerations by mergers and acquisitions. Thus, the examination of this unique integration will not only provide answers about synergies but also more insight into M&A research.

In 1967, Sony had formed a joint venture with CBS Records to manufacture and sell records in Japan. When Sony was preparing to launch the Betamax home videocassette recorder in 1974, it invited representatives from rival consumer electronics companies to preview the new technology but did not accept any advice or offers for joint-development. Two years later, Sony was surprised to learn that Matsushita subsidiary JVC was preparing to introduce its own Video Home System (VHS) to compete with Betamax. While JVC licensed VHS to other electronics firms, Sony chose to keep its Betamax format to itself and its prices even higher insisting that Betamax was superior in quality. � �

When the less expensive VHS started to take hold, motion picture studios began to release a larger number of their library titles on the format. The more expensive Betamax failed despite its technological to release a larger number of their library titles on the format. The more expensive Betamax failed despite its technological advantages. Matsushita had licensed its technology and created an electronics industry-wide effort to unseat Betamax. The Betamax failure was an embarrassment that intensified Sony's competitive feelings toward rival Matsushita.

Later, convinced that its record library had helped guarantee the success of the Compact Disc, Sony believed that the purchase of CBS Records would provide the software necessary to ensure the success of its new Digital Audio Tape technology. Almost immediately after the purchase, it began to consider the purchase of a studio to complement its music business. The Japanese yen had increased in value versus the dollar by more than 50% in the second half of the 1980s, which made it an attractive time for Sony to take such a plunge. After some time, Sony settled on Columbia Pictures, which came with two production units, Columbia and Tri-Star, and a significant library that included classics like Lawrence of Arabia and contemporary titles like Tootsie and Ghostbusters. Also under the Columbia umbrella was a syndicated television operation that included hits like Married...with Children and Wheel of Fortune. Importantly, Coca-Cola, which owned a 49% stake, seemed willing to sell.

On September 25, 1989, Japanese electronics major Sony acquired the US-based Columbia Pictures Entertainment (Columbia), which also included TriStar Pictures, paying $4.8 billion ($3.2 bn in cash and assuming an additional debt of $1.6 bn) for it.

Based on the reasons given above, the matrix below shows why and how Sony entered the movie business.

Fig: Choice of Entry Mode

Failure of the Acquisition

Industry analysts felt that the acquisition cost of $27 per share paid by Sony was very high compared to Columbia's share price of $12 at the beginning of 1989. Moreover, Sony paid 22 times more than the company's annual cash flows at the time of acquisition.

During the first five years of the acquisition, Sony faced many problems in its movie business. Though SPE scored some hits such as "Sleepless in Seattle" (1993) and "In the Line of Fire" (1993), most of its big budget films such as "Last Action Hero" (1994) failed miserably at the box-office during that period. Apart from this, escalating costs and attrition at the top management levels added to the problems of Sony's movie business.

As a result, in November 1994, Sony had to announce a $2.7 bn write-off of its investments in Columbia, in its quarterly financial report. It also showed an additional $510 million (mn) as operating loss (incurred from Columbia's operations during that quarter) in the financial report. For the financial year ending March 31, 1995, Sony reported a net loss of ¥293.36 bn compared to a net profit of ¥15.30 bn in the fiscal 1994.

Reasons for the Failure

1) Vastly different corporate cultures: The level of company involvement with employees' lives is typical in Japan, as are some highly unusual work practices. For instance, official clocking off time is 5pm, but nobody leaves the office before the boss several hours later, regardless of whether there is work to do or not. Employees are expected to put the company first, and can be permanently transferred to remote parts of the country without consultation. Rates of pay are determined only partially by rank within the company, and mostly by age, and it's inconceivable that a salary man would resign from his job. If he tried, he would be encouraged to rethink the move as it would reflect badly on his superiors. While there are women executives in the company, they occupy token positions and still experience a very real glass ceiling. Decision making is also highly centralized. Business deals were not approached head on but in circles. A deal would be finalized only after careful deliberation. The corporate culture at Columbia was different. Employees did not necessarily put company ahead of personal goals. There was a frank and open exchange of views. Business deals were approached head on.

2) Poor Understanding of the movie business: Sony had no prior experience in the move business. While they believed that a lot of synergies arose from vertical integration and from applying their technological competencies to the movie and television business, they had a weak understanding of the fundamentals of the business.

3) Hands off attitude: Sony had a hands-off attitude when it came to the studio business. As a result of a lack of controls, the top management was busy overspending on office renovations, company perks, and unsuccessful movies. Spending on production, management, and television also

ballooned. Overhead increased $100 million, or 50%, to $300 by 1991. Sony's overhead spending was $50 to $70 million greater than other major studios, and its $700 million production budget was nearly twice that of its competitors. The average Sony motion picture cost $40 million versus the industry average of $28 million. The excessive overhead and production costs pinched the company in 1991 as the motion picture industry saw year over- year box-office sales slump 25% in the worst box-office take in 20 years. Executive management was also unstable. A succession of studio chiefs came and went, invariably with very generous severance packages.

4) Legal Issues: Sony North America chief Mickey Schulhof, charged with recruiting a studio chief to run Columbia Pictures, settled on Peter Guber and Jon Peters, who ran the Guber-Peters Entertainment Company. The recent success of the Guber-Peters Entertainment Company (GPEC) was enough to convince Sony that it had found a suitable management team for their studio even �though Guber and Peters had just signed a fiveyear contract with Warner Bros. This meant that to get Guber and Peters, Sony would have to purchase their production company, which they did for $200 million, nearly 40% above its market value. Guber and Peters split $80 million from the sale of their stock and, as studio chiefs, would receive a salary of $2.7 million, a share of any increase in the studio's market value, and a $50 million bonus pool (to be parceled out at their discretion) at the end of five years. Although Guber had assured Sony otherwise, Warner Bros. Chief Steve Ross refused to let Guber and Peters out of their contract and sued Sony for breach of contract. Warner put forward three demands, and with the threat of a protracted legal battle hanging over its head, Sony capitulated. Warner (1) got to reclaim the portion of its Burbank lot controlled by Columbia in exchange for the old MGM lot it owned, which was located in Culver City; (2) received a 50% equity stake in Sony's lucrative Columbia House mail-order music club; and (3) obtained the rights to distribute Columbia's library over its cable networks. The total value of the settlement was estimated to be over $500 million.

5) Japanese Recession: Even in Sony's best year, 1992, its $400 million operating income was entirely eroded by interest and goodwill charges. With the Japanese recession, a slump in hardware sales, and the yen rising against the dollar, Sony executives in Tokyo started to put pressure on the studio to improve its results. Sony decided to pull out all the stops for its most anticipated film of 1993, Arnold Schwarzenegger's The Last Action Hero. The $90 million movie was to be the showpiece for every type of synergy that existed between the hardware and software sides of Sony: a Sony motion picture filmed using Sony HDTV equipment; Sony products prominently featured; a soundtrack released through Sony Music; and a premiere in Sony Theaters equipped with Sony's proprietary SDDS surround sound. The movie flopped. All together, 17 of the 26 movies Sony released in 1994 lost money, bringing the loss on filmmaking for 1994 to $150 million.

Merger between Daimler-Benz and Chrysler Corporation

Daimler-Benz

Daimler-Benz AG was a German manufacturer of automobiles, motor vehicles, and engines which was founded in 1926. An Agreement of Mutual Interestwhich would be valid until the year 2000was � �signed on May 1, 1924 between Karl Benz's Benz & Cie. and Daimler Motoren Gesellschaft, which had been founded by Gottlieb Daimler and Wilhelm Maybach. Daimler had died in 1900 and Maybach had left in 1907.Both companies continued to manufacture their separate automobile and internal combustion engine brands until, on June 28, 1926, when Benz & Cie. and Daimler Motoren

Gesellschaft formally mergedbecoming Daimler-Benz AGand ag� � reed that thereafter, all of the factories would use the brand name of Mercedes-Benz on their automobiles. Although Daimler-Benz is best known for its Mercedes-Benz automobile brand, during World War II it also created a notable series of aircraft, tank, and submarine engines. They were especially well known for their luxury cars.

Chrysler Corporation

The Chrysler Corporation is an American automobile manufacturer that has independently been producing automobiles since 1925.Through most of its history, Chrysler has been the third largest of the "Big 3" US auto makers, but in Jan 2007, DaimlerChrysler, excluding its luxury Mercedes and Maybach lines, also outsold traditionally second place Ford, though behind General Motors. 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.

Analysis: Star Framework

Let us look at the profiling of Daimler and Chrysler in the light of this framework.

1. Activity architecture

Daimler-Benz, meanwhile, was looking for a soul-mate. Despite a booming U.S. economy, its luxury vehicles had captured less than 1% of the American market. Its vehicle production method was particularly labor intensive - requiring nearly twice as many workers per unit produced over Toyota's Lexus division. It recognized that it could benefit from an economy of scale in this capital-intensive industry. Although Daimler-Benz is best known for its Mercedes-Benz automobile brand, during World War II it also created a notable series of aircraft, tank, and submarine engines. Roughly $44 billion was the market capitalization of Daimler-Benz before the merger.

2. Locational competencies

The German automobile industry was getting more and more export oriented.

3. Global coordination

An Agreement of Mutual Interestwhich would be valid until the year 2000was signed on May 1, 1924� � between Karl Benz's Benz & Cie. and Daimler Motoren Gesellschaft, which had been founded by Gottlieb Daimler and Wilhelm Maybach. Daimler had died in 1900 and Maybach had left in 1907. The name of Daimler as a brand of automobiles had been sold by DMGfollowing his death in 1900for use � �by other companies, so the new company, Daimler-Benz, would have created confusion and legal problems to include Daimler in its new brand name, and therefore, used Mercedes to represent the Daimler Motoren Gesellschaft interest. Karl Benz remained as a member of the board of directors of Daimler-Benz AG until his death in 1929. Both companies continued to manufacture their separate automobile and internal combustion engine brands until, on June 28, 1926, when Benz & Cie. and Daimler Motoren Gesellschaft formally mergedbecoming Daimler-Benz AGand agreed that � �thereafter, all of the factories would use the brand name of Mercedes-Benz on their automobiles. The inclusion of the name, Mercedes, in the new brand name honored the most important model series of DMG automobiles, the Mercedes series, which were designed and built by Wilhelm Maybach. Automobile manufacturers in Germany tended to look to exports for sales growth. And so did Daimler. But, Daimler was not globally widespread before the merger.

1. Activity architecture

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 Che� rokee 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 Motors. 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. 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 cutbacks.�

But CEO Bob Eaton expected some trouble brewing in the horizon.

2. Locational competencies �

The automobile market was booming during the 1990s in the US. And so the market proved to be supportive.

3. Global coordination �

Walter Chrysler had originally arrived at the ailing Maxwell-Chalmers company in the early 1920s, having been hired to take over and overhaul the company's troubled operations (just after having done a similar rescue job at the Willys car company).

In late 1923 production of the Chalmers automobile was ended. Then in January of 1924 Walter Chrysler launched the well-received Chrysler automobile. The Chrysler was a 6-cylinder automobile, designed to provide customers with an advanced, well-engineered car, but at a more affordable price than they might expect. (Elements of this car are traceable back to a prototype which was under development at Willys at the time that Chrysler was there). The Maxwell automobile was eventually dropped after its 1925 model year run, although in truth the new line of lower-priced 4-cylinder Chryslers which were then introduced for 1926 were basically Maxwells that had been re-engineered and rebranded. So, even Chrysler had no global integration of its operations.

So, on the basis of the above we give the following rating:

Star Framework

Parameters DaimlerChrysler

Activity architecture D B

Locational competencies B A

Global coordination C B

Rating

A Best in the industry Ideal

B Above Average Good

C Industry Average Satisfactory

D Below Average Poor

F Worst in industry Totally unsatisfactory

Reasons for the Merger

In 1997, the top management at Chrysler had 3 major problems: Chronic overcapacity, empowered buyers and environmental concerns that threatened the existence of the internal combustion engine. They felt that the only way to survive was to take on a partner. Daimler-Benz, meanwhile, was looking for a soul-mate. Despite a booming U.S. economy, its luxury vehicles had captured less than 1% of the American market. Its vehicle production method was particularly labor intensive - requiring nearly twice as many workers per unit produced over Toyota's Lexus division. It recognized that it could benefit from an economy of scale in this capital-intensive industry. With $2.8 billion in

annual profits, remarkable efficiency, low design costs, and an extensive American dealership network, Chrysler appeared to be the perfect match.

Based on the reasons above, the matrix below shows how Daimler-Benz entered the US Automobile Market.

Fig: Choice of Entry Mode

Failure of the Merger

Three years after the merger, Daimler Chrysler's market capitalization stands at $44 billion, roughly equal to the value of Daimler-Benz before the merger. Its stock has been banished from the S&P 500, and Chrysler Group's share value has declined by one-third relative to pre-merger values. Unlike the Mercedes-Benz and Smart Car Division, which posted an operating profit of EUR 830 million in Q3 2000, the Chrysler Group has been losing money at an alarming rate. In the same quarter, it lost $512 million.

Reasons for failure

Culture Clash

To the principles involved in the deal, there was no clash of cultures. "There was a remarkable meeting of the minds at the senior management level. They look like us, they talk like us, they're focused on the same things, and their command of English is impeccable. There was definitely no culture clash there."

Although Daimler Chrysler's Post-Merger Integration Team spent several million dollars on cultural sensitivity workshops for its employees on topics such as "Sexual Harassment in the American Workplace" and "German Dining Etiquette," the larger rifts in business practice and management sentiment remain unchanged.

James Holden, Chrysler president from September 1999 through November 2000, described what he saw as the "marrying up, marrying down" phenomenon. "Mercedes was universally perceived as the fancy, special brand, while Chrysler, Dodge, Plymouth and Jeep were the poorer, blue collar relations". This fueled an undercurrent of tension, which was amplified by the fact that American workers earned appreciably more than their German counterparts, sometimes four times as much.

The dislike and distrust ran deep, with some Daimler-Benz executives publicly declaring that they "would never drive a Chrysler". "My mother drove a Plymouth, and it barely lasted two-and-a-half years," commented Mercedes-Benz division chief Jürgen Hubbert to the Suddeutsche Zeitung. Irate Chrysler managers responded with jabs of their own. Bob Lutz, then Chrysler vice-chairman, pointed out to the Detroit Free Press that "The Jeep Grand Cherokee earned much higher consumer satisfaction ratings than the Mercedes M-Class".

With such words flying across public news channels, it seemed quite apparent that culture clash has been eroding the anticipated synergy savings. Much of this clash was intrinsic to a union between two companies which had such different wage structures, corporate hierarchies and values. At a deeper level, the problem was specific to this union: Chrysler and Daimler-Benz's brand images were founded upon diametrically opposite premises. Chrysler's image was one of American excess, and its brand value lay in its assertiveness and risk-taking cowboy aura, all produced within a cost-controlled atmosphere. Mercedes-Benz, in contrast, exuded disciplined German engineering coupled with uncompromising quality. These two sets of brands, were they ever to share platforms or features, would have lost their intrinsic value. Thus the culture clash seemed to exist as much between products as it did among employees.

Distribution and retail sales systems had largely remained separate as well, owing generally to brand bias. Mercedes-Benz dealers, in particular, had proven averse to including Chrysler vehicles in their retail product offerings. The logic had been to protect the sanctity of the Mercedes brand as a hallmark of uncompromising quality. This had certainly hindered the Chrysler Group's market penetration in Europe, where market share remained stagnant at 2%. Potentially profitable vehicles such as the Dodge Neon and the Jeep Grand Cherokee had been sidelined in favor of the less-cost-effective and troubled Mercedes A-Class compact and M-Class SUV, respectively.

The A-Class, a 95 hp, 12 foot long compact with an MSRP of approximately $20,000, competed in Europe against similar vehicles sold by Opel, Volkswagen, Renault and Fiat for approximately $9,000-$16,000. Consumers who ordinarily would have paid a premium for Mercedes' engineering and safety record had been disappointed by the A-Class which� failed an emergency maneuver test conducted by a Swedish television station in 1999. The A-Class appeared both overpriced and under-engineered for the highly competitive European compact market. The Dodge Neon, in contrast, could have competed more effectively in this segment with an approximate price of $13,000, similar mechanical specifications, and a record of reliability. Brand bias, however, had prevented this scenario from becoming reality.

Differing product development philosophies continued to hamper joint purchasing and manufacturing efforts as well. Daimler-Benz remained committed to its founding credo of "quality at any cost", while Chrysler aimed to produce price-targeted vehicles. This resulted in a fundamental disconnect in supply-procurement tactics and factory staffing requirements. Upon visiting the Jeep factory in Graz, Austria, Hubbert proclaimed: "If we are to produce the M-Class here as well, we will need to create a separate quality control section and double the number of line workers. It simply can't be built to the same specifications as a Jeep". The M-Class was eventually built in Graz, but not without an expensive round of retooling and hiring to meet Hubbert's manufacturing standards.

Mismanagement

In autumn 2000, DaimlerChrysler CEO Jürgen Schrempp let it be known to the world via the German� financial daily Handelsblatt - that he had always intended Chrysler Group to be a mere subsidiary of DaimlerChrysler. "The Merger of Equals statement was necessary in order to earn the support of Chrysler's workers and the American public, but it was never reality". This statement was relayed to the English-speaking world by the Financial Times the day after the original news broke in Germany.

To be sure, it was apparent from Day One that Daimler-Benz was the majority shareholder in the conglomerate. It controlled the majority of seats on the Supervisory Board; yet the DaimlerChrysler name and two parallel management structures under co-CEOs at separate headquarters lent credence to the "merger of equals" notion.

This much, however, is clear: Jürgen Schrempp and Bob Eaton did not follow a coordinated course of action in determining Chrysler's fate. During 1998-2001, Chrysler was neither taken over nor granted equal status. It floated in a no man's land in between. The managers who had built Chrysler's "cowboy bravado" were no more. Some remained on staff, feeling withdrawn, ineffective and eclipsed by the Germans in Stuttgart. Others left for a more promising future at G.M. or Ford. The American dynamism faded under subtle German pressure, but the Germans were not strong enough to impose their own managers. According to a Daimler-Benz executive, "Eaton went weeks without speaking with Jürgen. He preferred to maintain lower-level contact. Jürgen, meanwhile, was afraid of being labeled a takeover artist. He left Chrysler alone for too long".

Why? According to one well-placed senior executive at Chrysler, "Jurgen Schremp looked at Chrysler's past success and told himself there is no point in trying to smash these two companies together. Some stuff was pulled together but they said operationally let's let the Chrysler guys continue to run it because they have done a great job in the past. What they didn't take into account was that immediately prior to the consummation of the merger or shortly thereafter, enough of the key members of that former Chrysler management team left. They saw the forest but they didn't realize that removing four or five key trees was going to radically change the eco system in that forest. It was a misjudgment."

As a result, Chrysler sat in apathy, waiting for Daimler's next move - a move which came too late -- eleven months after Eaton's retirement -- when Schrempp installed a German management team on November 17, 2000. During that interval, Chrysler bled cash.

After the merger, many people in Auburn Hills observed that co-CEO Bob Eaton appeared withdrawn, detached, and somewhat dispassionate about the company he continued to run. Even Schrempp encouraged him to "act like a co-chairman and step up to the podium" to no avail. Two �valuable vice-presidents, engineer Chris Theodore and manufacturing specialist Shamel Rushwin, left for jobs at Ford. According to then-president Peter Stallkamp, Eaton "had really checked-out about a year before he left. . .The managers feared for their careers, and in the absence of assurance, they assumed the worst. There were a good eighteen months when we were being hollowed out from the core by the Germans' inaction and our own paralysis".

During the period 1998-2000, the Honda Odyssey came to rival the Dodge Caravan, the

Toyota Tundra threatened the Dodge Ram, and SUVs from GM, Ford, Nissan and Toyota attacked Jeep's market share. Chrysler responded with little innovations, and competitive price reductions only began in Q2 2001. Its traditional dominance in the SUV and light truck market had been challenged, and it had not adequately responded. While Chrysler's management languished, the market continued to function, and the industry left Chrysler in the dust.

Synergy savings are only achieved when two companies can produce and distribute their wares more efficiently than when they were apart. Owing to culture clash and a poorly integrated management structure, DaimlerChrysler is unable to accomplish what its forbears took for granted three years ago: profitable automotive production.

Literature Review

This study by Albert Banal-Estañol (City University and University of Cambridge) and Jo Seldeslachts (Social Science Research Center Berlin) conducted in April 2006 proposes an explanation as to why some mergers fail, based on the interaction between the pre-merger gathering of information and the post-merger integration processes. They show that a firm may optimally agree to merge and abstain from putting forth any integration effort, counting on the partner to the necessary efforts. If the two partners follow the same course of actions, the merger goes ahead but fails. They show that private signals need to be noisy enough in order to ensure equilibrium uniqueness.

In the organizational literature, poor merger performance has often been connected to post-merger problems. The mere existence of post-merger issues, however, is not enough to explain failures. Firms are aware of future organizational difficulties when taking merger decisions. Daimler and Chrysler, for example, anticipated post-merger challenges.

This paper argues that informational asymmetries and strategic uncertainty in the post-merger stage may lead mergers to not attain their potential synergy gains and consequently to fail. We build a simple model that investigates the interaction between the pre-merger and the post-merger processes.

Their theory builds on three main ingredients. First, firms possess some private information about the uncertain potential synergy gains when making merger decisions. The reaction of the competitors, the economic fundamentals or the unknown strategic fit of the partners make these gains uncertain. Before merging, however, prospective partners collect information. Although part of this information is shared, another part remains private. Potential partners do not want to give out all their information. If the merger does not materialize, for example, firms could use this information against each other when competing.

Second, synergy achievement hinges upon the exertion of effort by the top management of each partner. Top managers' efforts are needed, for example, to steer their old firms' culture towards a new common corporate culture (Carrillo and Gromb). Or, they may be necessary to increase the degree of interaction with the merger partner through a restructuring of material or communication flows. Merging partners do not act together, however. Due to a lack of team spirit and trust, top managers from different merging partners are much less likely to cooperate than managers within the same merging partner.

And third, post-merger efforts are non-contractible and show strategic complementarities. In many circumstances it is intrinsically hard to describe the desired post-merger actions to distinguish them from seemingly similar actions with very different consequences. We thus argue that post-merger actions are not easily verifiable and therefore neither ex ante nor ex-post contractible. Further, actions in the post-merger phase are likely to be plagued by ambiguity about what each other is doing, leading to strategic uncertainty. More specifically, due to organizational complexity and

specialization, post-merger efforts need to fit with one another and are thus characterized as strategic complementary.

They find a unique equilibrium in symmetric switching strategies. If both partners expect substantial synergies, then each of them agrees on merging and exerts a post-merger effort, turning the merger into a successful entity. If at least one of them has low expectations, then the merger does not go through. More interestingly, if both partners receive intermediate signals, then each of them may optimally agree on merging and abstain from exerting any post-merger effort, expecting the other partner to do the necessary efforts.

Provided that they have equal or less information than their management, shareholders of each firm accept the agreement. The merger goes then ahead but fails, because it does not obtain the potential synergy gains. Their mechanism provides thus a rationale for how mergers may fail due to post-merger problems.

Timing of the Game

Conclusion

Given the importance of integration to acquisition success, how can companies' best manage this process?

There are several important considerations.

� Understand that most of the value creation in an acquisition occurs after the deal is done. For all the synergies and benefits that are projected to accrue from an acquisition none can be realized without substantial effort during the integration process.

� Plan for integration before doing the deal. There are many reasons why companies do not do this such as time constraints, insufficient information, lack of awareness of how critical �integration really is but the alternative is to essentially guess at the sources of value creation. �Develop a checklist of key integration issues, assign personal responsibility and a timetable for dealing with these issues, and set targets that will enable the value creation needed to make the deal work. Although integration is a process that cannot be completed in a few days, this analysis should yield a blueprint for how to create value from the acquisition.

� Work the details. Some of the confusion and complexity of cross-border mergers can be mitigated by ensuring that executives in an acquiring company learn about differences in accounting standards, labor laws, environmental regulations, and norms and regulations governing how business is conducted in the country of the acquired firm early in the process.

� Develop a clear communication plan throughout the entire process. The prospective melding of different country cultures in a cross-border deal can easily compound the uncertainty employees experience in any merger, and must be addressed in a proactive manner.

In sum, there are two fundamental imperatives that must be underscored in any discussion of cross-border mergers and acquisitions. First, companies engage in a merger or acquisition to create value, and that value creation comes about through a combination of synergy realization to cut costs and competitive strategy repositioning to increase revenues and growth. And second, both the synergy realization and competitive strategy goals cannot be achieved without significant attention to the challenge of acquisition integration. If cross-border M&A strategies are to fulfill their potential, and justify the pr