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STRATEGIC MANAGEMENT OF MERGERSPresented & Modified by-
CA. Shrenik Chhabra
M.Com, ACA
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AGENDA
A. STRATEGIC MANAGEMENT
B. STEPS OF STRATEGIC MANAGEMENT
OF M&A
C. SOME DECISION STRATEGIES OF1. ACQUIRER
2. TARGET
3. CASE : ARCELOR MITTAL MERGER
D. FAILURE OF M& A1. MAJOR FACTORS
2. REASONS FOR FAILURE AT DIFFERENT STAGE
3. CASE : DAIMLER CHRYSLER MERGER
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Strategic management is an ongoing process that evaluates andcontrols the business and the industries in which the company is
involved; assesses its competitors and sets goals and strategies to meet
all existing and potential competitors; and then reassesses each
strategy annually or quarterly [i.e. regularly] to determine how it has
been implemented and whether it has succeeded or needs replacement
by a new strategy to meet changed circumstances, new technology, new
competitors, a new economic environment., or a new social, financial, or
political environment. (Lamb, 1984:ix)
Strategic management is the art and science of formulating,
implementing and evaluating cross-functional decisions that will enablean organization to achieve its objectives. Strategic management,
therefore, combines the activities of the various functional areas of a
business to achieve organizational objectives.
A. Strategic management
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Strategic management in case
of mergers will cover the
various things management
should consider during the
merger process.
It will also cover what all things
should the management do toget maximum out of the
mergers
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B. STRATEGIC MANAGEMENT OF
MERGERS
1. Integration process
2. Due Diligence
3. Organizational dynamics created by M&A
4. Organizing, involving coordinating task force
5. Honest communication
6. Retaining key people
7. Structure and staffing decision
8. Merger measurement
9. Cultural integration10. Human capital Integration and HR functions
11. Merger repair
12. Recommendation for success
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1.INTEGRATION
i. Motives
ii. Threats
iii. Impact of mergers
iv. Steps in Mergers
v. Stages of Mergers
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I. MERGER MOTIVES
Growth and diversification
Synergy
Fund raising
Increased managerial skill/technology
Tax consideration
Increased ownership liquidity
Defense against takeovers
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II. THREATS OF MERGERS..
Monopolizing of industry
Cost cutting through Lay-offs
Poor synergy realization
Induces complexity, duplication of people,processes and technology
There are various aspects which if not managedcarefully during a merger can become majorpitfalls, for example, issues of managing
Intellectual Property, human resourcesencompassing cultural diversity andperspectives, technology platforms, supply chainmanagement, product/service delivery channels,etc.
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III. IMPACT OF MERGERSANDACQUISITIONS
1. On workers or employee:
- layoffs
2. On top level management:
- clash of egos
- variation in culture3. On shareholders:
a) of acquiring firm-most affected, they are harmed by the same degree to which
target firm shareholders benefitted
b) of target firm-benefitted the most
-acquiring company usually pays a little excess than it what
should
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IV. STEPS IN M&A
1. Pre Merger
1. Assessment/Due Diligence
2. Negotiation
2. Merger1. Decision
2. Implementation
3. Post merger
1. Integration
Each stage is very critical from the point of
view of a merger.
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V. STAGES OF MERGER
1. Pre-merger stage: Both firms gather
information about the uncertain synergy gains of
merging. Information can be shared or kept
private.
2. Merger Stage: Managers of both firms decide
unilaterally (and sequentially) whether to merge.
Only when both firms agree to merge there is a
post-merger stage.
3. Post-Merger Stage: The two units of the new
firm decide unilaterally and simultaneously
whether to do an integration effort.
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2.DUE DILIGENCE
Literally means persistent application to ones work.
Detailed investigation process by an investor for the target
company business.
Influence decisions like direction of investment, choosing of
investment partner, disclosures etc
Persons involved : professional advisors,
financial/legal/operational professionals
Areas of due diligence :
1. Financial Due Diligence
2. Legal Due Diligence
3. Operational Due Diligence
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2.1.1 FINANCIAL DUE DILIGENCE
Examining the target companys historical,
current and prospective operating results, can be
worked out from following sources
1. Audited financial statements.2. Unaudited financial information
3. Financial information with stock exchanges
and regulators regulation(SEBI)
4. Tax returns5. Cash Flow Statements
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2.1.2 LEGAL DUE DILIGENCE
Involves the practices of addressing certain fundamentallegal issues which include good compliance practices as perthe Companys Act, SEBI Act, Income Tax Act and othercorporate legislations. Can be done from following sources:
1. Memorandum of Association
2. Target companys Prospectus
3. Documents filled with Registrar of companies
4. Tax returns and compliance service
5. Environmental law Compliance
6. Lending agreements , Covenants and borrowingpowers
7. Compliance with any special industry legislation
8. Labor agreements ,compensations
9. Pending litigation
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2.1.3 OPERATIONAL DUE DILIGENCE
Includes investigating the targets IPRs, its
productions, its sales and marketing effort, its
HR and other operational issues. They can be
taken by analyzing information from:
1. Newspaper and magazines reports ABOUT
THE TARGET
2. Information with trade association
chambers and regulatory bodies
3. Company journal, brochure & websites
4. Inputs from market, market experts,
suppliers & customers
5. Interviewing the employees, ex-employer etc
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2.2 CONDUCTING DUE DILIGENCE
There are 2 ways of conducting Due Diligence :
1. Data room method : large amount of data is presented
to interested party to study it
2. Questionnaire method: a questionnaire is put to
target company and on the basis further one to one
negotiations are done
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2.3 CONTENTS OF DUE DILIGENCE
REPORT
1. Corporate documents of the Company and
Subsidiary
2. Issue of Shares
3. Material Contracts and Agreements4. Litigation
5. Employees and related inormation
6. Immovable property
7. Taxation
8. Insurance and liability
9. Joint venture and collaboration agreement
10. Government regulations-
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3.1 ORGANIZATIONAL DYNAMICS
CREATED BY M&A
1. Aggressive financial targets
2. Short timeliness
3. Culture clashes
4. Politics and positions5. Restructuring & re-engineering
6. Communication issues
7. Employee motivation
8. Question about where to downsize
9. Retention of key personnel
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CONCEPTS OF CHANGE MANAGEMENT
Define clear leadership goals
Extensive communication
Tough decisions
Focus on customers
Manage resistance at every level
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5. COMMUNICATION MODEL FOR
MERGERS
Effective communication is made a priority
All messages linked to strategic objective of the
integration effort
Honest communication Proactive emphasis than reactive one
Messages should be consistent and repeated
Mechanism for two way feedback
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6.RETAINING KEY PEOPLE
Identify key people
Understand what motivates them
Why people stay- job content, level of
responsibility , company culture, salary Why people leave- low growth potential
Lack of challenge, lack of autonomy, work
environment issues, salary issues etc.
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7.STRUCTURE AND STAFFING
DECISIONS
Always a difficult one, politically and emotionally
charged, so some general principles to follow:
1. Begin with due decision analysis of HR
2. Act quick- the sooner, the better3. Communicate openly about staffing
decisions
4. Train hiring managers on steps of
responsible selection procedure5. Catch and correct mistakes
6. Start development and team building
process asap
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8.MERGER MEASUREMENT
Keeping a track of whether moving in right
direction on realizing the goals of deal
Identify the potential hot spots before they flare
OOC! Ensuring a smooth flow of information
Involving more people in integration process
Sending message about the new companys
culture Integration measures, operational
measures, process & cultural measures and
financial measures
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8.1 MEASUREMENT ..
Integration measure: whether the overall
integration approach is accomplishing its mission
of leading organisations through change?
Operational measures: tracking any potentialmerger related impact on day-to-day business-
sales, safety, consumers
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8.1 MEASUREMENT..
Process and culture measures: are the
business and management processes being
effectively redesigned and implemented?
Financial measures :Are we achieving the dealsynergies? eg classroom training, emailed
synergy kit.
Integration measured through:
1. Automated feedback channel- emails, confidential toll-
free hotlines and bulletin boards on a website
2. Targeted telephone surveys
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9 CULTURAL INTEGRATION
Most integration initiatives fall short of reaching their
goals during implementation stage and follow-up.
Organization culture comprises of : rules and policies, goals
and measures , rewards and recognition, staffing &
selection, Training & development, Ceremonies and event,Leadership behavior, communication, physical
environment .
The company should
1. recruit and promote service oriented candidates,
2. train the workforce in techniques of service3. Set goals that are based on service
4. Reward an recognize people for higher level of service
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10 HUMAN CAPITAL
INTEGRATION & HR FUNCTIONS
HR contribute strategically to enterprise wide
integration between manufacturing, finance,
R&D and marketing and sales
Support business group transition activities likestaffing& selection etc
Integrate new organisation and process
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11 MERGER REPAIR
You closed the deal over 2 years ago, but
organisation is still not operating as one
company. Merger repair refers to post deal
integration.
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YOU NEED A MERGER REPAIR
WHEN..
1. Service is suffering
2. Customers are confused and defecting
3. Performance targets have not been achieved
4. Stock prices falling5. Key integration activities are behind
schedule
6. Analysts comments
7. The organisation cannot handle additionalacquisition
8. Key executives and employees are leavingand many more.
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12.KEY TO M&ASUCCESS
Conduct due diligence analyses in financial and human
capital related areas
Determine require/desired degree of integration
Speedy(not reckless) decisions
Gain the support and commitment from senior managers
Clearly defined approach of integration
Select highly respectable and capable integration leader
Dedicated capable people for the integration core team and
task force Use best practices
Set measurable goals and objectives
Continuous communication and feed back
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C. DECISIONS STRATEGIES
1. For Acquirer :
a) If negotiations go successful- move on withimplementation step for friendly merger.
b) But if negotiations are not successful- Hostiletakeovers, Tender offers, Dawn Raid
2. For Target :
a) If happy with the deal , accept the offer OR
b) Negotiate the terms of Deal or
c) If the target finds the valuation to be very lowor if there is some unconscionable flaw in thedeal then they may reject the deal ,thendangers of hostile takeover arise.
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TACTICS OF ACQUIRER
1. Hostile TakeoverThis is an unfriendlytakeover attempt by acompany or raider that is
strongly resisted by themanagement and theboard of directors of thetarget firm. These types oftakeovers are usually badnews, affecting employee
morale at the targetedfirm, which can quicklyturn to animosity againstthe acquiring firm
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TACTICS OF ACQUIRER
Tender offer :An offer topurchase some or all ofshareholders' shares in acorporation. The priceoffered is usually at a
premium to the marketprice. Tender offers may befriendly or unfriendly.Securities and ExchangeCommission laws requireany corporation or
individual acquiring 5% ofa company to discloseinformation to the SEC,the target company andthe exchange
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TAKEOVER DEFENSES BY
TARGET CO.1. Golden Parachute
This measure discourages an unwanted takeover by offering lucrative benefits
to the current top executives, who may lose their job if their company is taken
over by another firm. Benefits written into the executives contracts include
items such as stock options, bonuses, liberal severance pay and so on. Golden
parachutes can be worth millions of dollars and can cost the acquiring firm a
lot of money and therefore act as a strong deterrent to proceeding with their
takeover bid.
2. Shark Repellent :Any one of a number of measures taken by a company to
fend off an unwanted or hostile takeover attempt. In many cases, a company
will make special amendments to its charter or bylaws that become active
only when a takeover attempt is announced or presented to shareholders with
the goal of making the takeover less attractive or profitable to the acquisitivefirm.
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3. Leveraged recapitalization : Payment of large debt
financed dividend. This strategy increases the firms financial
leverage, thereby deterring takeover attempt.
4. Macaroni Defence
This is a tactic by which the target company issues a large
number of bonds that come with the guarantee that they will be
redeemed at a higher price if the company is taken over. Why is
it called macaroni defense? Because if a company is in danger,the redemption price of the bonds expands, kind of like
macaroni in a pot! This is a highly useful tactic, but the target
company must be careful it doesn't issue so much debt that it
cannot make the interest payments.
5. People Pill : Here, management threatens that in the event of
a takeover, the management team will resign at the same time
en masse. This is especially useful if they are a good
management team; losing them could seriously harm the
company and make the bidder think twice
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7. Poison Pill
With this strategy, the target company aims at making its own stock less attractive to
the acquirer. There are two types of poison pills. The 'flip-in' poison pill allows existingshareholders (except the bidding company) to buy more shares at a discount.. The
goal of the flip-in poison pill is to dilute the shares held by the bidder and make the
takeover bid more difficult and expensive.
The 'flip-over' poison pill allows stockholders to buy the acquirer's shares at a
discounted price in the event of a merger. If investors fail to take part in the poison pill
by purchasing stock at the discounted price, the outstanding shares will not be dilutedenough to ward off a takeover.
An extreme version of the poison pill is the "suicide pill" whereby the takeover-target
company may take action that may lead to its ultimate destruction.
8. Sandbag
With this tactic the target company stalls with the hope that another, more favorablecompany (like a white knight) will make a takeover attempt. If management
sandbags too long, however, they may be getting distracted from their responsibilities
of running the company.
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9. White Knight
This is a company (the good guy) that gallops in to make
a friendly takeover offer to a target company that is facinga hostile takeover from another party (a black knight).
The white knight offers the target firm a way out with a
friendly takeover.
10. Scorched Earth Policy :An anti-takeover strategy that
a firm undertakes by liquidating its valuable and desiredassets and assuming liabilities in an effort to make the
proposed takeover unattractive to the acquiring firm.
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CASE ARCELOR-MITTAL MERGER
In January 2006, Mittal Steel launched a $22.7
billion offer to Arcelors shareholders. The deal
was split between Mittal Shares (75 percent)
and cash (25 percent). Under the offer, Arcelor
shareholders would have received 4 Mittal
Steel shares and 35 euros for every 5 Arcelorshares they held.
The steel industry is highly fragmented, the
top 5 manufacturers in the steel industry
account for less than 25 percent of the
market (to put that in perspective, thecorresponding figure for the automotive
industry is 73 percent). LN Mittal believes
that the consolidation will end with three of
four major companies dominating the
industry around 2010.
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THE CONTROVERSY??
Arcelor Management: The management believed that Arcelor itselfwould have been doing the acquisitions and not the other way around.The management was extremely hostile to Mittal Steels bid from thebeginning. Arcelor repeatedly played the patriotic card in order forshareholders to reject the bid. Guy Dolle the CEO of Arcelordismissed Mittal Steel as a company of Indians and unworthy oftaking over a European company. (all this despite the fact that most
industry analysts and investment banks pointing out that the dealwas in Arcelors best interests)
The French government (despite not being a shareholder) was againstthe deal because of worries over its 28000 Arcelor employees. Despiterepeated assurances from Mittal that the deal would not lead tolayoffs the government of France was never convinced. The
government of Luxembourg (a stakeholder) was against the deal aswell for a variety of reasons. The European Union approved of theMittal-Arcelor deal.
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THE STANCE OF THE INDIAN
GOVERNMENT
Most Indians were of the opinion that the dealwas not getting pushed through because ofLakshmi Mittals Indian nationality. The Indiangovernment raised the issue at several forums
especially through commerce minister KamalNath. It was also alleged that India hadthreatened not to ratify a taxation accord withLuxembourg due to the latters opposition to thedeal.
The irony is that LN Mittal himself felt thatthere was no case ofracism here as Mittal Steelwas a European company and NOT an Indianone.
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AND THE OUTCOME WAS
The deal was finally clinched when the
shareholders of Arcelor agreed to Mittal Steels
offer ending the transaction that had dragged on
for months.
Mittal had to however considerably sweeten the
initial offer. Under severe pressure to
counteract the Arcelor- Severstal merger, Mittal
had to raise its valuation of Arcelor to $32.9
billion. The Mittal family holds 43 percent of thecombined group. The combined company holds 10
percent of the global market for steel. The
consolidation phase is well and truly underway .
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WORKOUT INFERENCE ON.
1. Strategy adopted by Arcelor
2. Strategy adopted by Mittal.
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SOME TERMS
Tender offer
Poison pill
Dawn raid Saturday night special
Golden parachute Greenmail
Macaroni defense
People pill
Sand bag
white knight
Hostile takeover
Antitrust
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FAILURE OF MERGER &
ACQUISITION
Mergers and Acquisitions (M&As) have become the dominant mode of growth for
organizations seeking a competitive advantage in an increasingly complex and
global business economy. Every merger, acquisition, or strategic alliance
promises to create value from some kind of synergy, yet statistics show that the
benefits that look so good on paper often do not materialize. Unfortunately, manymergers and acquisitions fail to meet their objectives, which are typically to
accelerate growth, cut costs, increase market share or take advantage of other
synergies.
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A global A.T.Kearney study suggests that 58 percent of all mergers, acquisitions,
and other forms of corporate restructuring fail to produce results rather than
create value.
Similarly, a KPMG survey found that "83 percent of mergers were unsuccessful
in producing any business benefits regards shareholder value.
A major McKinsey & Company study found that "61 percent of acquisitionprograms were failures because the acquisition strategies did not earn a sufficient
return (cost of capital) on the funds invested".
Between 55 and 77 percent of all mergers fail to deliver on the financial promise
announced when the merger was initiated.
Even though most mergers and acquisitions are carefully designed, they still
face major challenges. Nearly two-thirds of companies lose market share in the
first quarter after a merger; by the third quarter, the figure is 90 percent. In the first
four to eight months that follow the deal, productivity may be reduced by up to 50
percent.
WHY FAILURES?
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STRATEGIES FOR MANAGING
HUMAN RESOURCE IN M&A
Communication
Common culture
Training anddevelopment
Mutual respect
Individual counseling
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REASONS FOR FAILURE AT DIFFERENT
STAGES OF MERGER(SUMMED UP)
Pre merger
1. Lack of research
2. Incomplete and Inadequate DueDiligence
3. Excessive premium
4. Size Issues5. Striving for Bigness
6. Faulty evaluation
7. Merger between Equals
8. Mergers between Lame Ducks
Merger
1. Lack of Proper Communication
2. Diversification
3. Diverging from Core Activity
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POST MERGER
1. Poor Cultural/organisation Fits
2. Ego Clash
3. Failure of Leadership Role.
4. Poorly Managed Integration
5. Inadequate Attention to People Issues
6. Loss of Identity
CASE D C M
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CASE: DAIMLER CHRYSLER MERGER
FAILURE
In 1926, the merger of two German automobile manufacturers
Benz & Co. and Daimler Motor Company formed Stuttgart-based,German company Daimler-Benz. Its Mercedes cars were arguablythe best example of German quality and engineering.
In 1998, Daimler-Benz and U.S. based Chrysler Corporation, twoleading global car manufacturers, agreed to combine their
businesses in what was perceived to be a 'merger of equals'.Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton,Chairman and CEO of Chrysler Corporation met to discuss thepossible merger.
The merged entity ranked third (after GM and Ford) in the world
in terms of revenues, market capitalization and earnings, andfifth (after GM, Ford, Toyota and Volkswagen) in the number ofunits (passenger-cars and commercial vehicles combined) sold.
.
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In 1998, co-chairmen and co-CEOs, Schrempp and Eaton led the merged company to
revenues of $155.3 billion and sold 4 million cars and trucks. But in 2000, it suffered
third quarter losses of more than half a billion dollars, and projections of even
higher losses in the fourth quarter and into 2001. In early 2001, the merged
company announced that it would slash 26,000 jobs at its ailing Chrysler division
In May 2006, after a decade of disappointing results, Daimler finally sold
Chrysler to private equity firm Cerberus Capital for 3.74 billion.
The Daimler Chrysler merger proved to be a costly mistake for both the
companies. Daimler was driven to despair, and to a loss, by its merger
with Chrysler. In 2006, the merged group reported a loss of 12 million
euros.
The good results this quarter have come after selling the Chrysler
division in the U.S. and cutting jobs at Mercedes-Benz Cars.
Without Chrysler, Daimler reported profits of 1.7 billion euros (1.3
billion) for the fourth quarter and a net profit of 4 billion euros for the
year (3.8 billion euros in 2006). Sales rose to 99.4 billion euros ($144.98
billion) from 99.2 billion euros, with 2.1 million automobiles sold globally.
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CAN YOU GUESS WHY THE MERGERFAILED ?
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INFERENCES
Analysts felt that though strategically, themerger made good business sense. Butcontrasting cultures and management styleshindered the realization of the synergies.
Daimler-Benz attempted to run Chrysler USA
operations in the same way as it would run itsGerman operations.
Daimler-Benz was characterized by methodicaldecision-making. On the other hand, the US basedChrysler encouraged creativity.
While Chrysler represented American adaptabilityand valued efficiency and equal empowermentDaimler-Benz valued a more traditional respect forhierarchy and centralized decision-making.
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THANK YOU !!