The Daimler-Chrysler Collision
Another merger in search of that elusive synergy
In the wake of Daimler-Benz AG's $40 billion acquisition of Chrysler Corp., simply the latest in what has become an unending series of massive mergers, it seems increasingly likely that this is all the fault of that ad campaign for Godzilla. Tell people often enough that size matters, and look what happens. (Feel free to insert your favorite Viagra joke here.) At this rate, it'll be the Fortune 15 before too long. But each of those 15 companies will offer a full range of financial instruments, car models, and computer chips. It'll be just like Korea, only better.
Actually, that's far too harsh a verdict on the new DaimlerChrysler, particularly since Daimler-Benz has spent the last four years shedding noncore businesses and refocusing its energies on automobiles, which now account for 70 percent of its revenues. In addition, as I've pointed out here before, the auto industry is facing severe problems with excess capacity, so reducing the number of players in the global marketplace may decrease the chance of dramatic overbuilding. Finally, unlike the Citicorp-Travelers deal, Daimler and Chrysler will not try to merge fundamentally different product lines in an elusive quest for super market glory. Economies of scale do exist in capital-intensive industries, which means there are opportunities for companies to be simultaneously bigger and more efficient.
Still, it's not clear those conditions will exist in DaimlerChrysler. At first glance, in fact, it looks as if Daimler-Benz got taken. That may seem an odd conclusion, when you consider that Chrysler is both more profitable than Daimler--earning $2.8 billion last year on $61 billion in sales, where Daimler earned $1.8 billion on $69 billion in sales--and vastly more efficient. If Daimler is adding all the resources of a low cost, lean manufacturing powerhouse to its already impressive collection of assets, how can it be getting the raw end of the deal?
In the first place, as impressive as Chrysler's comeback from the debacle of the late 1970s and from the disastrous later years of Lee Iacocca's reign was, the company is hardly the jewel of American manufacturing that last week's press accounts made it out to be. Last year, the company's earnings slid by 20 percent, while GM's and Ford's both rose; and its U.S. market share is just 15 percent. And while Chrysler's Jeep and SUV lines are excellent, it doesn't make a single passenger car of note, aside from the limited-release Dodge Viper and Prowler.
Chrysler definitely did a brilliant job of reinventing itself in the early 1980s, taking advantage of the fact that it operated tax-free until 1985 (because of carry-over losses) to streamline its operations and rework its design and manufacturing processes. It also slashed payrolls, cutting the white-collar work force in half and the blue-collar work force by almost a quarter. As a result, it halved the number of vehicles it had to sell every year to break even. More recently, Chrysler's tough-love approach has given its parts suppliers a financial incentive to cut costs--with resulting savings to Chrysler of $3.7 billion since 1990. But how all this is really relevant to Daimler-Benz remains somewhat unclear.
D aimler is not, after all, getting Chrysler at no cost. Rather, Daimler will be paying--depending upon what its own stock price does--something like $13 billion more for Chrysler than the stock market had thought Chrysler was worth. That's a huge premium and, in exchange for it, Daimler must be expecting to receive more than just the opportunity to include Chrysler's sales with its own. It must be expecting "synergy."
Certainly "synergy" is the word on the lips and the word processors of everyone who has commented on the deal. But not all these commentators seem to understand what synergy means. For instance, there's very little overlap between the product lines of the two companies. Chrysler sells SUVs, minivans, trucks, and mass-market cars. Mercedes sells luxury sedans and sports cars. This doesn't mean synergy is automatic. All it means is that the two companies are complementary, that there are no redundancies. And while DaimlerChrysler will be able to offer cars to the full spectrum of buyers, the current lack of overlap also means there aren't any easy cost savings to be found by eliminating duplication. It also means the deal's effect on the overcapacity problem will be negligible, unless you believe Daimler is going to cut back on production of its E-class sedans because it's also making the Dodge Neon.
To repeat a point made here too many times before, synergy occurs only when two companies together can make and market products more efficiently than they were able to do apart. Daimler is going to have to be able to make and sell more Mercedes more cheaply because it has acquired Chrysler, and vice versa, for the deal to make sense. And with a $13 billion premium, the deal has to make an awful lot of sense.
From Chrysler's angle the possible synergies are fairly obvious. Chrysler gets 93 percent of its sales from North America. Daimler will give it immediate entry into the European market, and presumably some of the Daimler cachet will rub off on Chrysler abroad. Daimler's cars feature safety innovations that Chrysler will be able to incorporate into its vehicles and, most intriguingly, Daimler has been a pioneer in fuel-cell technology, which means that Chrysler will immediately become the dominant American player in developing noncombustion-engine cars.
But what will Daimler get? Chrysler's expertise in front-wheel-drive engineering will be a nice addition, although it hardly seems likely that Mercedes is suddenly going to abandon rear-wheel drive. And there is the hope that Chrysler's lean manufacturing style will help Daimler shake up a company that is still heavy with layers of middle management. Chrysler makes four times as many cars as Daimler with fewer than half the workers, and although there are good reasons for this--luxury cars require more labor, Daimler is diversified into other labor-intensive businesses--much of the difference does stem from Daimler's bureaucratic approach. The addition of Chrysler may help change that approach, but how remains to be seen. Chrysler's elaborate system of dealerships might, in theory, help Mercedes crack the U.S. market, where its share is now less than 1 percent. But, as Daimler recognizes, selling Mercedes through Chrysler dealers--with all the memories of the Volare and K-Car--could damage the car's treasured cachet.
James Surowiecki writes the financial column at The New Yorker.