The Chrysler-Benz Marriage

Oh Lord, wont you buy me a

Mercedes Benz?

My friends all drive Porsches, I

must make amends.

Worked hard all my lifetime,no

help from my friends.

So Lord, wont you buy me a

Mercedes Benz?

It would be nice to think that Robert Eaton, Chryslers chairman, was a Janis Joplin fan, intent on giving his shareholders at least a part of her dream. In fact, the impulses behind the merger talks between Chrysler and Daimler-benz, which makes Mercedes cars, are more hard-headed.

They boil down to three changes under way in global business: one specific to the auto industry, one arising directly from German circumstances and one relevant to big companies everywhere. Prodded by these trends, this particular merger is heavy with potential. Overnight, it would make Daimler the only European carmaker with a strong position in the mass US car market, and put the merged group in contention with General Motors and Toyota for global leadership.

 

Of course, the chances of negotiations failing are great - there are enormously delicate issues of corporate and national culture and control to resolve first. Nonetheless, the trends that gave birth to the discussions are irresistible, and will mould the future of Chrysler, Daimler and other big carmakers.

The first trend is the reshaping of the car market. It is this change that makes a merger between a luxury car manufacturer of workaday transportation like Chrysler conceivable. Traditionally, the automotive industry has been divided into three broad segments: big trucks, light trucks and cars. The car segment was divided into three: luxury cars, ordinary cars and low-volume specialty vehicles like Jeeps or sports cars. The past decade has seen a complete re-ordering of this structure.

Light trucks, the ubiquitous and increasingly luxurious pickups, have merged with cars to form a single category in America: this year, almost as many light trucks will be sold as passenger cars. Ordinary cars can boast many of the attributes in quality, performance and comfort that were once the preserve of luxury cars. And speciality vehicles, such as sports cars, offroad sport utility vehicles and the people-carrier multi-purpose vehicles have become the industrys fastest-growing and most profitable products.

Of all US manufacturers, Chrysler has adapted to this new era best and fastest. It has particular strength in light trucks last year, it had 22 percent of the US truck market but just 9 per cent of the car market, giving it a total market share of 15 per cent. Its jeep subsidiary has a strong presence in the sport utility market. And its MPVs, like the Chrysler Voyager, are leaders in that segment.

All this has been made possible by a reorganisation of engineering and production staff into platform teams, which has freed them from corporate bureaucracy and allowed them to produce imaginative designs much more quickly.

By comparison, Daimler - like most non-US carmakers - seems stuck in yesterdays market. The mainstay of its product line is traditional luxury saloons. And much of its engineering effort is going into smaller cars, historically less profitable than their larger cousins.

It has much to learn from Chrysler, not least how to get a wider variety of cars to market more quickly, while preserving a distinct and individual design flair for each model. But from Daimlers point of view, product questions may well be secondary. The most striking aspect of the merger talks, viewed from the German angle, is that they are taking place at all.Traditionally big Germany companies have manufactured their goods at home and exported to the rest of the world.

Any substantial overseas operations they have built up have usually been achieved through organic growth. Intellectual value-added, product design and corporate momentum have all been firmly based in Germany.

At a stroke, Daimler is abandoning this tradition, triggering the same sense of shock in the German business community as it did with its decision to list its shares in New York and comply with US accounting standards in 1993. It is considering a future in which US shareholders have at least as strong a voice as German ones, and in which it must share creative hegemony with engineers from an entirely different tradition.

A host of practical questions arise. If the new merged company is to be based in Germany, how will Chryslers board members and institutional shareholders deal with the legally enforced co-determination between managers and workers which is a feature of German supervisory boards?

When the merged board first meets, how will it strike a balance between the two companies' business models? On roughly similar revenues, Chrysler has twice the income, more than twice the number of vehicles sold and fewer than half the employees. And how will it reconcile Chryslers determination to be solely an automotive company with Daimler-Benzs central role in Germanys aerospace industry?

These questions may be too difficult to resolve now - which is why the merger may prove hard to complete. But they symbolise the issues with which all big German companies must cope as they strive to become truly global.

These can best be summed up in a single phrase: coming to terms with America. Learning to live not just with US product markets, or even US capital, but with the Faustian consequences of both: the US approach to product design, engineering process and corporate performance.

Successful US subsidiaries in Germany and flourishing German offshoots in the US prove that it is possible to combine the strengths of the two cultures at an operational level. The challenge is now to combine them at board level too.

The third trend postpones and blurs this tricky adjustment: a move across all industries and in many different countries towards mergers that take the form of share-swaps rather than cash purchases. This approach to mergers has one genuine advantage: it reduces the need to pay a premium for control, since the shareholders on both sides gain from any efficiencies caused by the merger.

It also has a number of apparent advantages, which in the long run are likely to prove drawbacks. First, all paper deals are a characteristic of a booming stock market. Such deals have a higher chance of proving disastrous, since they are predicated on a future viewed through inherently rosy spectacles.

Second,they allow both sides to blur the issue of who is taking over whom- which usually results in a prolonged period of corporate infighting. Although genuine mergers of equals do occur, most such deals require the victory of one corporate culture or the other.

Third, the implications for shareholders are also blurred. The cost of a paper transaction remains less obvious than one paid for in cash. The discipline exerted on managers proposing a merger by the need for shareholder approval is therefore less - there is a higher probability that an all-paper transaction will be driven by motives other than shareholder value.

The trends that brought the Daimler and Chrysler to the stage of serious discussions are all powerful. The first two are lasting ones that make a merger tempting; and the third, though temporary, makes it financially affordable.

But such underlying trends do not guarantee a successful transaction; there is much more talking to come even if the two boards are edging towards agreement.

Without a successful merger of minds, the transaction could rapidly sour, Or, as Janis Joplin put it in One Night Stand: Just because we loved tonight, please dont think its gonna stay that way.

Peter Martin Financial Times