Car Books – Overdrive

Continued from Car Books – First Gear, Second Gear, Third Gear, Fourth Gear, Fifth Gear

And I did just that with my very next car book. After finishing Once Upon a Car: The Fall and Resurrection of America’s Big Three Automakers – GM, Ford, and Chrysler by Bill Vlasic,

I saw at the end of the book that Vlasic had previously coauthored with Bradley Stertz, another book about the merger of Chrysler with Daimler-Benz, the parent company of Mercedes-Benz entitled Taken for a Ride: How Daimler-Benz Drove Off with Chrysler.

Since I had just read about the breakup of the marriage of these two companies after the financial meltdown of 2008, I thought it would be interesting to read about how the marriage had begun. I was in for a big surprise.

Interestingly, many of the same players were involved and same tactics. Kirk Kerkorian who had tried to take over GM in 2006 had actually tried to take over Chrysler in 1995, using the same tactics and the same person, Jerry York. As with his failed attempt to takeover GM, his earlier run at Chrysler also ended in failure. But the close call got Chrysler realizing how vulnerable they might be and so began secretly working a deal to develop a joint venture or joint development project with Daimler. The talks appeared promising for a while but ultimately fizzled out and were discontinued.

Then a few years later, internal analyses were done by many of the car companies with the short-term projections showing that there was going to be a huge overcapacity of automobile manufacturing globally. Several car companies were already in dire financial situations and the consensus was that with the overcapacity, the industry was ripe for consolidation.

Separately, Ford, Chrysler, and Daimler-Benz each were developing merger strategies and almost simultaneously, Ford approached Daimler-Benz at the same time Daimler-Benz approached Chrysler which itself was secretly preparing to approach Daimler-Benz. It made for an interesting love triangle.

Secret talks continued among the three carmakers until the Ford-Daimler deal was vetoed by the strong Ford family (which owned 40% of the voting shares) when it was divulged that Ford would not be the buyer in the Daimler deal, but rather the bought company.

With the Ford talks off the table, Daimler-Benz could then focus its efforts 100% on Chrysler. But on multiple occasions, the executives involved ran into snags that jeopardized derailing the whole deal. One huge question was whether the new company would be chartered in the US, in Germany, or in a neutral country (The Netherlands). National pride prevented the Daimler-Benz team from settling on anything other than a German corporation since Mercedes-Benz, the crown jewel of German industrial might, had been the original inventor of the automobile. But when it was learned that the tax advantages of the combined companies favored an AG company, Chrysler readily agreed for the good of the new company.

Another major hurdle was the exchange rate of outstanding Chrysler and Daimler shares for shares in the new combined auto company. With Daimler’s share price to earnings per share (price-earnings ratio) more than double Chrysler’s, Daimler shares would be exchanged one-for-one in the new company. The rub was what portion of a share in the new company would Chrysler shareholders get when they exchanged their existing Chrysler shares. Since many in the US thought Chrysler shares were undervalued, this was Chrysler’s one chance to rectify that. Intense negotiations went back and forth between the two corporate teams before final terms were agreed upon.

When the deal was on the verge of consummation, even the name of the new company proved divisive. Both companies wanted their name first in the combined name and had gone back and forth multiple times. The company name remained in doubt up until the very day both boards were voting on the proposed merger. In a last minute call from Chrysler CEO Bob Eaton to Daimler-Benz CEO Jürgen Schrempp, Eaton threatened to cancel the deal if the Chrysler name didn’t come first. Schrempp indicated that for him, that was also a showstopper.

On the precipice of failure, Eaton quickly met with his current president (Tom Stallkamp) and former president (Bob Lutz, who rarely got along with Eaton) about the name issue. Schrempp had offered two options and when Lutz said he thought DaimlerChrysler sounded classier than Daimler-BenzChrysler, Eaton agreed. In exchange, Chrysler won a concession to be able to pick a future board member making it sound almost like draft negotiations for a professional sports team and team name.

Keeping all the negotiations secret for so long was extremely difficult and even involved some subterfuge at times. When rumors began to surface at Chrysler that something BIG was in the works, Hyundai cars were discreetly, but strategically placed on Chrysler’s site as a ruse and a bogus trip to Korea arranged (through talkative assistants) to supposedly explore a potential linkup with the financially strapped carmaker.

After four months when the news finally broke, it was huge—the largest corporate merger in history! And several months later when all the approvals were obtained and Day 1 of the new company (17 November 1998) was celebrated on Wall Street and at every combined company location, it was a huge, huge party.

As with any marriage, the wedding and honeymoon were joyous occasions but it wasn’t long before major differences in culture and business processes became major stumbling blocks. From the Daimler perspective, no action could be taken or decision made that would tarnish the ultra high-class Mercedes image.  From the Chrysler perspective, this attitude was not endearing especially considering that Chrysler enjoyed the most cost effective productivity of any carmaker and Daimler sorely needed to improve their profitability per vehicle. One of the major factors that originally attracted Daimler to Chrysler in the first place was this very large advantage in cost structure (Chrysler made a larger profit margin selling reasonably priced vehicles than Daimler did selling much higher-priced vehicles).

Within a year of the formation of DaimlerChrysler, it was obvious that the “merger of equals” was anything but that. Even executives within the company admitted it should never have been portrayed that way. With the real authority of the company vested in the old Daimler CEO, Schrempp, Chrysler took a subordinate role in the corporation and numerous executives left to pursue other opportunities, including the former Chrysler CEO, Eaton.

The book closes within two years of the merger hoopla and Chrysler doing poorly financially. It is no surprise that the “merger made in heaven” fell to Earth within just a few short years with Daimler dumping Chrysler in 2007 (as covered in Vlasic’s other book previously mentioned). While I knew from history that the marriage had not even lasted a decade, this book gave me inside knowledge of the tumultuous relationship the companies had had and valuable insights through the players own words as to what brought it all about.