Employees: 466,900 at the end of 1999

Manufacturing Facilities: in 34 countries.

Global Brands: Mercedes-Benz, Chrysler, Plymouth, Jeep, Dodge, Smart,

Freightliner, Sterling, Setra, Airbus, Eurocopter, Ariane, Debis and

others.

Product sold: More than 200 countries

Official Language: English

Financial Reporting: US-GAAP accounting with earnings reported quarterly.

Reasons for merging and new opportunities.

In 1998, at the Detroit Auto Show, the idea of cooperation of Daimler-

Benz and Chrysler Corporation was born. Schrempp, Chairman of Daimler-Benz

and Eaton, chairman of Chrysler Corporation, began negotiations about

possible combination of two large automobile manufacturers. “We are

leading a new trend we believe will change the future, the face of the

industry,” Eaton said five months later when the deal was announced.

The two chairmen acknowledged that the merger would not be easy.

Their own study of transnational mergers suggested that 70 percent failed

to achieve the kind of success that had been anticipated.

As a result of the long series of negotiations, a new company named

Daimler-Chrysler was established. The company would manufacture not only

cars, but commercial trucks, trains and rockets as well.

The goal of the merger was to create a company that would be able to

stand better against other world leading car producers like General Motors,

Ford, Nissan, Volkswagen, Toyota and so forth.

With the creation of a new company, both of the old components were

going to benefit from the following:

. Decreased R&D expenses per production unit

. Confluence of technologies of both firms

. Double strength in total

. Opportunities in new markets

. Decrease in price of materials bought from suppliers

Opportunities in new markets

Both Chrysler Corporation and Daimler-Benz operate in quite saturated

markets (in terms of their current products). In order for them to grow,

they will have to carry on those overseas markets, which means development

of products in accordance with preferences of the new markets.

Developing new products for a different market segment or establishing

an additional brand might have implications for the positioning of the

existing product range. Penetration into completely new market segments

for both companies would involve both high costs (new offices, stores, and

advertisement programs) and substantial risks for the companies.

Another method for successful penetration and establishment in new

markets is co-operation with another manufacturer who already has a

successful brand and products in place in the segments where it is

represented. In this way, the existing product portfolio could be

broadened without any risk to each company’s brand identity and its

associations of exclusiveness.

Daimler-Benz is well-known and recognized in Europe and USA for its

high-quality cars and has firm customers; however, the opportunities are

limited. The newly industrializing countries in Latin America and Asia, on

the other hand, offer good prospects for growth—starting from a low

level—to the premium products segment. To penetrate these fast-growing

markets on any scale, however, it would be necessary to launch new, low-

priced products, possibly combined with the creation of a new brand name.

The new direction will certainly require new funds and the company might

not be able to handle this hard task alone. Another possible problem of

penetrating the new markets in Latin America and Asia is, was the

establishment of new offices, stores, research of new customer’s’ tastes,

and advertisement. To cope with this obstacle to its success,

DaimlerChrysler seeks companies in those areas for possible merger, like

Daywoo, Mitsubisi and so forth.

Chrysler has not penetrated the European market very deeply. It

certainly will be a good opportunity for Chrysler Corporation to start

cooperation with Daimler-Benz in order to penetrate the European market

without additional costs for opening its offices and stores.

At the same time, Chrysler has very a good market in North America and

can facilitate Daimler-Benz’s deep penetration into that market with a new

program of minivan production.

Decrease in Price of Materials Bought from Suppliers

One major benefit of the merger is that both companies can save lots

of money on external purchases. First, saving will take place in

purchasing raw materials from suppliers. Before the merger, both companies

had to buy from supplier separately. Everyone knows this law of the market:

“the more you buy, the less you have to pay.” Now the companies purchase

everything together and the quantity of one batch is doubled, this bad led

to significant decrease in price on per-unit basis. For example,

DaimlerChrysler already saved $1.4 billions in 1998. In turn, decreases in

price for raw materials will provide lower prices for the cars in total and

increase compatibility of the new company.

Decrease in R&D expenses per production unit

Another positive aspect of the merger is that both of the companies

can combine their efforts in researching and developing new products.

Before the merger each of the companies had to conduct research for itself

and these costs were spread on per unit basis among all products. Now

these costs are spread on a significantly larger quantity of products,

which allows decreasing costs of the research and development per every

production unit. In addition, intellectual powers of both companies will

now work for one huge company—DaimlerChrysler. This factor will bring new,

combined ideas into the new company.

Facts:

“On April 17, 2000, DaimlerChrysler announced a new Virtual Reality Center

in Sindelfingen, Germany. The Company estimates the new facility will

reduce costs of making Mercedes-Benz prototype models by up to twenty

percent a shorten product development times while improving quality.”

Confluence of Technologies of Both Corporations

Both of the companies have their own advantages, in terms of

technological development. Now, when all these advantages represent one

solid company, the new company has more chances for surviving in the car

manufacturing industry. The following are evidences of recent innovations

in DaimlerChrysler.

“DaimlerChrysler researchers in Ulm, Germany, have developed an

infrared-laser night vision system that significantly increases a

driver’s visibility at night. The system allows drivers to recognize

darkly clothed pedestrians and cyclists even at great distances. It

also illuminates the road ahead over a distance of around 500 feet

without blinding the drivers of oncoming vehicles.

The system functions as follows: two laser headlights on the vehicle’s

front end illuminate the road by means of infrared light that is

invisible to the human eye. A video camera records the reflected

image, which then appears in black and white on a screen located

directly in the drivers’ field of vision, or else as a so-called head-

up display on the windshield.”(Auburn Hills, April 5, 2000)

Double Strength of New Corporation

One of the factors that investors are looking for before making their

investment decision is a company’s overall stability. Usually the large

corporations are considered to be stronger than small ones.

The new size of DaimlerChrysler might lead to more stability, which in

turn could mean lower rates of return required by investors. It might be

one of the new savings aspects of the company.

Market concerns

The automotive industry has seen increased global consolidation over

the past two years, The New York Times reported. According to industry

analysts, the consolidation is fueled by three major trends: brands growing

in importance, manufacturers forging into difficult markets, and rising

costs of technology. While many industry experts see the consolidation as

inevitable and strategically beneficial, some analysts warn excessive

consolidation could lead to diminishing choices and higher prices for

consumers.

The Daimler-Chrysler merger is one of the few examples when the merger

benefits the competitiveness of the market. Chrysler Corporation

manufactures lower-range trucks, minivans, and sport utilities, when

Daimler-Benz majors in high-priced vehicles. No significant overlap in

production will take place. Since both of the companies specialize in

different areas, neither of them will have to give up on some of their

production. “There was no real overlap in products –they filled in each

other’s blank spaces” said David Cole, the head of the University of

Michigan’s Office for the Study of Automotive Transportation. In turn,

this meant that there will be no decrease in competition in the market

place, which is one of the main concerns of the Federal Trade Commission

when a merger takes place. (In a horizontal merger, the acquisition of a

competitor could increase market concentration and increase the likelihood

of collusion. The elimination of head-to-head competition between two

leading firms may result in unilateral anticompetitive effects).

Another concern of The Federal Trade Commission and European

Commission is the possibility of monopolization of the market. The

automobile market is very large and diversified. For example, July 1999

car sales in the USA for the three largest companies are as shown on the

graph:

Even after the merger, Daimler-Chrysler is not capable of keeping

such a huge market under control. As one can see on the above chart,

Daimler-Chrysler (243420 vehicles) is on the third place in production

after General Motors (422029 vehicles) and Ford Motor Co. (355765

vehicles).

In the case of Chrysler Corporation and Daimler-Benz, the hazard of

competition decrease does not exist, because the companies produce

different types of cars. There would be a decrease of competition if after

the merger, one of the companies would have to give up some of its

production plans and eventually consumers would be hurt. Instead, it will

just intensify competition in the car manufacturing world. On July 24 and

July 31 of 1998, the European Commission and the Federal Trade Commission,

respectively, approved the merger of Chrysler and Daimler-Benz Corporation,

and appearance of Daimler-Chrysler. This merger is classified as a

“horizontal merger.”

In order to become the largest car-producing corporation in the

world, Daimler-Chrysler has to acquire or merger with some other companies,

and this is in fact, what Daimler-Chrysler is looking at right now. On

March 10, 1999, Daimler-Chrysler broke off talks about buying a stake in

Nissan Motor of Japan, but it has not given up. On March 22, 1999,

Schrempp held negotiations with Japan’s Mitsubishi Motors about a possible

merger. As it can be seen, the new corporation very actively looks for

partners in Asia, but the question that might rise soon will be whether the

next merger will be approved by the Federal Trade Commission.

Another fact that might alert the US government is that on February

25, 2000, General Motors Corporation, Ford Motor Corp. and DaimlerChrysler

jointly announced that they are planning to combine their efforts to form a

business-to-business integrated supplier exchange through a single global

portal. Some view this fact as a slow movement towards market

monopolization.

Facts:

German-American automaker DaimlerChryslter agreed on March 27, 2000,

to buy a controlling 34% stake in Japan’ Mitsubishi Motors Corp. for

2.1 billion, extending its international reach.

The agreement gives DaimlerChrysler access to the Asian market and

small-car expertise of Mitsubishi, Japan’s fourth-largest automaker.

Carmakers are increasingly seeking cross-border alliances as

overcapacity prompts them to cut costs through the sharing of parts

and vehicle platforms with manufacturers in a range of markets.

DaimlerChrysler’s deal excludes Mitsubishi’s trucks division, which

has an alliance with Sweden’s AB Volvo. Together DaimlerChrysler and

Mitsubishi will have a combined market share of about 10.8% in Japan

and 9.4% in other parts of the Asia-Pacific region. Daimler’s

purchase gives it the right to veto board-level decisions at

Mitsubishi.”[i]

New Corporation

Daimler-Chrysler provides a variety of transportation products and

financial and other services. It operates seven business segments:

passenger cars and trucks (Chrysler, Plymouth, Jeep, Dodge; 43% of 1998

sales), passenger cars (Mercedes-Benz, Smart; 23%), commercial vehicles

(Mercedes-Benz, Freightliner, Sterling, Setra; 17%), aerospace (7%),

services (6%), Chrysler financial services (2%), and other (2%).

Daimler-Chrysler Corporation is primarily active in Europe, North and

South America and Japan and is continuing to expand in markets such as

Eastern Europe and East and Southeast Asia (intensive negotiations with

Asian companies are obvious evidences of that).

Another aspect of penetrating new markets is that developing new

products, opening new stores and offices, hiring managers, and training

stuff requires a lot of funds. There are two ways of raising these funds:

internal and external. Internal funds come from Retained Earnings.

External funds come from loans, bonds, issuance of common stock and other

sources. The merger would increase the amount of money in Retained

Earnings that could be used in an expansion program. Through the pooling

of resources, DaimlerChrysler will be excellently placed to develop and

introduce new products even more quickly into the markets, thus gaining an

edge over competitors.

Achievements of the New Corporation

“DaimlerChrysler AG today reported a record operating profit of EUR

11.0/$11.1 billion in 1999, the company’s first full year of

operations. This is an increase of 28% compared to the 1998 figure of

EUR 8.6/$8.7 billion. Adjusted for one-time effects, principally the

sale of debitel shares and restructuring expenses at Adtranz,

operating profit grew by 20% to EUR 10.3/$10.4 billion. Operating

profit thus outpaced revenues which rose by 14% to a record EUR

150.0/$151.0 billion.”

Recently, the German financial magazine “Capital” conducted a survey

on the provision of shareholders’ information on the Internet. The overall

winner was DaimlerChrysler, which was recognized as the best provider of

company information on the Internet.

Survey of recent stock performance

Immediately after the merger, the stock price of the new company went

up very drastically. The reason for this is that investors strongly

believe in the future success of DaimlerChrysler.

Currently, the stock price is down. This fact can be explained by the

general performance of the market, which is experiencing very sudden

slumps. Many huge companies do not trade at all out of fear of prices

drop. Below is the chart of stock price performance of the DaimlerChrysler

since the merger.

Below is a valuation of DaimlerChrysler by analysts at Standard &

Poor’s.

“DCX has fallen sharply from its early 1999 peak. The automotive

sector has been out of investor favor for some time, with

DaimlerChrysler contributing to the negative sentiment with its much

lower than expected earnings in the second quarter. Despite DCX’s

attempt to portray the divergence from expectations as mostly

accounting and temporary items, the honeymoon for investors and

DaimlerChrysler is clearly over. DaimlerChrysler has a strong

balance sheet, with significant cash reserves available for the next

industry downturn, as well as for strategic investments and

alliances. With strong sales through September, we expect 1999

domestic automotive volume, led by minivans and sport utility

vehicles, DCX strengths, to reach a record. Still, given negative

investor sentiment and uncertainty in the company’s ability to meet

financial objectives, despite a strong third quarter, we would not

add to positions.”[ii]

Comments on some of the Financial Ratios of the New Corporation

As the ratios reveals new corporation by some of the ratios overcome

industry average. Valuation ratios show us DaimlerChrysler is in better

standing in comparison with the industry. Dividends payout ratio proves

that the company pays more dividends than average, but I think it is not

what investors expected and this lead to a drop in price of the stock.

Financial strength of the company in terms of LT Debt to Equity and

Total Debt to Equity ratios is almost twice stronger than the average in

the industry. Low return on Equity ratio might be explained by the fact

that the company keeps a lot of cash for the purpose of new investment. In

general, the company shows strong figures and this view is supported by

Standards & Poor’s specialists’ statement. “DaimlerChrysler has a strong

balance sheet, with significant cash reserves available for the next

industry downturn, as well as for strategic investments and

alliances.”[iii]

Government Concerned that...

One of the problems that can arise for the economies of the US and

Germany is downsizing of some of the departments. For example, one company

does not need two raw material purchase departments. In this case, the new

company will need both of its departments because of different languages.

The new company will provide more job opportunities for both countries.

There are two reasons why this might be so:

1) Expansion plans will require more people to be hired for the new company

2) Because of different languages, much of the documentation has to be

translated back and forth.

This figure shows expansion so far:

Since both companies are introduced to new markets and new

opportunities, they will have to increase their production capacities in

order to meet demand in the new market. This factor will require more

labor ( as can be seen from the above graph), so more people will be

hired. Government does its best to support companies that can provide more

employment opportunities for the population, because this contributes to

the solution to the unemployment problem. Simultaneously, with the increase

of labor involved in the production process, there will be an increase in

gross domestic product.

Environmental Issues in the New Corporation

Protection of the surrounding environment and conserving the natural

foundations of life should be one of the main concerns of every company and

every human being on the Earth. Due to lack of attention to these issues

the current environment conditions of the earth have changed dramatically

for the worse.

DaimlerChrysler is one of the world corporations that pays a great

deal of attention to environmental issues. Its management clearly

understands the importance of these issues in the long run. The following

facts speak up for themselves:

“DaimlerChrysler and the European Nature Heritage Fund (Euronatur)

presented an upbeat review of ten years of environmental cooperation

at a press conference in Berlin today. "The concerted efforts of

DaimlerChrysler and Euronatur have decisively moved forward

environmental protection and habitat security in important large

natural landscapes," a joint statement said.[iv]

“On March 29, 2000, DaimlerChrysler’s manufacturing facility in

Toluca, Mexico, introduced to production a new wastewater recycling

facility. The recycling facility will conserve precious water

resources and reduce the potential for pollution by totally recycling

all of the water used in the plant.”

In 1998, DaimlerChrysler spent $1.3 billion on environmental

protection, according to the company’s Annual Environmental Report. Most

of this amount (about $813 million) was spent on research and development

activities on green products and manufacturing processes.[v]

Conclusion

There is only one thing can be said about the future of the new

company—it is unclear. As one can see throughout the research, firstly

after the merger investors strongly believed in the future of

DaimlerChrysler, and as a result of that the stock price soared high.

Recently the stock price has dropped significantly, but some believe that

it is because entire market experiences slumps. As seen on the prior chart

of the stock performance, DaimlerChrysler’s stock price lost 1/3 of its

value. Another reason why the stock price slumps is that estimated

earnings did not match actual ones. As a December 1999, difference in

estimated and actual earning was ($0.64).[vi]

One of the positive aspects of the merger is intensified competition

in the auto-production industry. The new company is far from monopolist

size in this very giant market. General Motors and Ford Corporation are

still main competitors of DaimlerChrysler.

Bibliography

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[i] London CNN, http://CNNfn.com/, Monday, 27 March, 2000

[ii] Standard & Poors, Stock Report, March 4, 2000

[iii] Standard & Poors, Stock Report, March 4, 2000

[iv] www.daimlerchrysler.com

[v] www.daimlerchrysler.com

[vi] Yahoo Finance, Market Guide—Multex Earnings Estimates for

DaimlerChrysler AG

Indirect sources

1. World Motor Vehicle Data, American Automobile Manufacturers Association,

1998

2. www.yahoofinance.com, Market Guide—Comparisons for DaimlerChrysler AG

3. “The Causes and consequences of antitrust”; the public-choice

perspective; Fred S.McChesney, William F.Shughart II; University of

Chicago Press, 1995.

4. “The corporate merger”; William W. Alberts & Joel E. Segall;

University of Chicago Press, 1966

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