welfare project

8/7/2019 welfare project

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Sonia Yadav

IIPM (GGN)

2/3/2011

M&A FAILURE


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How merger of daimler chrysler failed in 2007 A report submitted for internal assessment of

WELFARE ECONOMICS

Under the guidance of

Prof. PANKAJ UPADHYAY

PREPARED BY

Sonia yadav

IIPM TOWER-1, BUILDING NO.79

GURGAON-122001 (HARYANA)


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ACKNOWLEDGEMENT

I thank Mr . PANKAJ UPADHYAY in particular for assigning me thistopic and encouraging me to write in the first place. I owe much to him for hishelpful comments. Mere words will never be able to express the gratitude towardshim, who not only stimulated the idea of undertaking the project, but also interactedwith me frequently giving valuable advice during critical stages of work.

I am indebted to all those who have been helpful throughout the processof writing this Report but as the clich goes, I am solely responsible for anyremaining errors of fact or judgment. Finally I would like to be grateful to all thosewho directly or indirectly have been of great help and obliged me with their supportand have helped me in converting the collection of data and information into afinely polished project.


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CONTENTS

acknowledgment r eason f o r D aimle r cry sle r me r ge r communication challenges o f the me r ge r r epo r t submitted by the media on me r ge r o f D aimle r cry sle r discussion on the r epots dailme r p r o f it a f te r me r ge r f ailu r e in 2007 some majo r me r ge r f ailu r e

wh y me r ge r and aqquisition f ails r easons f o r me r ge r and acquisition f ailu r e conclusion


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The D aimle r Ch ry sle r M e r ge r

The DaimlerChrysler merger was announced on May 7, 1998. Itproduced a shock in the business media. The Wall Street Journal named it the

biggest industrial merger of all time. Other media in a similar manner, as well asscholars, journalists and financial analysts applauded the announcement. Themerger was considered to be a merger of equals, and was supposed to be verysuccessful. In less than two years it became apparent, that it was an n acquisition,rather than a merger of equals, and Chrysler, as an American car manufacturer nolonger existed.

R easons f o r the M e r ge r

Initially the deal seemed to make sense for both companies. BothCEOs, Robert Eaton of Chrysler and Jurgen Schrempp of Daimler-Benz,independently concluded, that their companies needed a partner to survive in thefuture on the car market. Even though there is wide spread opinion, that bothcompanies could have survived independently, the logical reasoning behind themerger makes a lot of sense.

Chrysler, having been close to bankruptcy almost once in everydecade, was extremely vulnerable financially. That was proved by the hostiletakeover attempt, carried out by its largest shareholder, Kirk Kirkorian togetherwith its former legendary chairman of the board, Lee Iacocca, who wanted toregain control over the corporation after his board almost had to force him toresign. Chrysler survived the crisis, however, that was a clear indication, that thecorporation needed a change, which would bring stability and financial security.

The change would have to involve expansion to other markets.Chrysler was a strong player on the US market only, besides its strength wasguaranteed by its pick up truck, SUV and minivan divisions. Chrysler passengercars were not a success on the market. Increasing Chrysler s share on theinternational market required major investments: neither did the corporation


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have plants abroad, nor did it have a sufficient dealer network. To conclude,Chrysler needed a financially strong partner, with a significant internationalpresence.

Daimler-Benz was financially stable; it was one of the largestGerman companies, which was a conglomerate of over 20 different businesses.However, 95% of its profit came from one division Mercedes-Bens. That madethe corporation less secure. The Mercedes division had a rather small share of theentire automotive market; besides, it was clear, that the market segment forluxury cars had reached its peek capacity and was no longer growing.

To ensure stable growth and stability in the near future, Daimler-Benz needed to extend its reach into other market segments. However,diversifying, or stretching the Mercedes brand would result in destroying itsbrand identity. Therefore, Daimler needed an outside partner to enter the newmarkets. Besides individual reasons of each partner, there was a common reasonfor the merger to be a success. The companies were almost meant to be partners:their product lines almost did not overlap; with German quality and attention todetails and American low cost efficiency and innovativeness complementing eachother.

The merger was considered to be birth of a new type of corporation,which would become a leading automotive, transportation and services company.Forbes (1998) reported, No, this merger isn't about savings. It isn't aboutblending German caution with Yankee freewheeling It is about taking twosplendid companies and transforming them into a real world-scale, trulymultinational business. Business Week (1998), emphasized, The merger of Daimler Benz and Chrysler Corp. will clearly rock the global auto industry. But thecreation of this new powerhouse is more than an industrial mega deal. It'sperhaps the first sign that the forces of globalization have succeeded in reshapingEurope Inc. Companies such as Daimler Benz now seem to be strong andconfident enough to deal on an equal footing with their American counterparts.


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Communication Challenges o f the M e r ge r

However, there were significant challenges facing the merger.Daimler has been run as a conglomerate with 21 separate businesses; while

Chrysler was a highly centralized car and truck manufacturer. The two companieswere separated by geography, tradition and national culture. Both companies hadtheir own historical heritage. Chrysler, founded in 1924 by Walter P. Chrysler, wasan American legend, an independent automaker that survived major crisis, was onthe edge of bankruptcy several times, and still managed to grow into amanufacturing giant and become a member of the big three American carautomakers. Mercedes-Benz, which later, in 1924 grew into Daimler-Benz, was aGerman legend, famous through the world for its luxurious cars, as well as forcreating the first car in the world in 1834. Both companies were deeply respectedin their nations, both had their own museums, and both were fiercely protectiveof their corporate identity. The companies had very different corporate cultures,which were based on different national cultures. Keller (1998) states, when itcomes to the cultures of these two companies, they re oil and water ( Unhappilymarried, 1999).

In Germany, for example, Mercedes-Benz workers are used to taking

several company-sanctioned beer-brakes a day. In the US, the practice wouldraise the specter of alcohol-related accidents and legal liability. However,DaimlerChrysler chairman Jurgen Schrempp, to the amazement of his Americancolleagues, had a bar installed and the fire alarm shut off in his new office, so thathe could enjoy his cigars and European work environment.

If Chrysler was considered to be innovative, then Daimler-Benz was itscomplete opposite. The Germans embraced formality and hierarchy, from a well-

structured decision-making process to the suit and tie dress code and respect fortitles and proper names. Chrysler broke barriers and promoted cross-functionalteams that favored open collars, free-form discussions and casual names.

However, in relation to sexual harassment issues, the Americansproved to be much more conservative than the Germans. Jurgen Schrempp never


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made a secret of his intimate relationship with his personal assistant. In general,many issues, that could become flashpoints of discord in the US, from workforcediversity to smoking on the factory floor, were barely discussed in Germany. Wewere not trying to bring two worlds together to create a new one. The idealmerged company will still have noticeable differences, like a choir that needsdifferent voices to achieve the perfect sound, according Dirk Simmons, acorporate strategist from Daimler-Benz who served on the DaimlerChryslerintegration team. Simmons said, that the companies research suggested thatmore than 70 percent of cross-border mergers fail within three years because of cultural differences. DaimlerChrysler s post-merger integration team, which has100 members, has studied more than 50 failed cross-border deals to identify allthe things that might go wrong and try to avoid making the same mistakes( Unhappily married, 1999).

Still, some cultural differences were more complicated, if notimpossible to solve. The lifestyles of the German and American managers turnedout to be very different. Americans enjoyed much higher salaries, while theGermans enjoyed larger expense budgets. However, that caused difficulties inpersuading Americans to relocate to Germany, while many German managersembraced the possibility to move to spacious homes in America. From theoutset, the German obsession with planning has kept everyone on edge, said oneof Chrysler s executives. We Germans look for big reports, and then we havelong meetings with long discussions, said Hubbert from Daimler-Benz. We aregetting the message that meetings can last one hour with few papers. That was acomplete opposite of the Chrysler culture, which was shaped by a creativecollection of industry renegades ( Unhappily married, 1999).

Among other things, these cultural differences caused problems

for the two companies respective PR departments. The Chrysler team, led bySteve Harris, and the Daimler-Benz team, led by Christoph Walther, clashed fromthe start (How the DaimlerChrysler merger flunked cultural test, 2000). Theinitial argument was about the release date of the news release, announcing themerger. The release was scheduled for a time, suitable for the European media;however that meant 2 a.m. in the Eastern United States.


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According to Vlasic and Stertz (2000), the Chrysler team,spontaneous and theatrical, found the Germans demanding to the point of domineering. The PR staff clashed over press kits: the Germans wanted to replacethe highly distinctive, creative, attention-grabbing kits designed by the Chryslerstaff (including the award-winning Dodge Durango press kit designed like aWheaties cereal box) with stark white folders. The German staff designed acommemorative watch with the names of the two companies on the strap.However, when the strap was fastened, the Daimler name overlapped Chrysler s.Company news releases were written in German and then translated into English,and went out in the morning, German time. Very soon the impression becamethat the Germans had the top. The media started reporting stories of Americanideas being shunted aside as German managers began imposing the Daimler wayof doing business.

As the cultural differences became more obvious, morecommunication challenges were raised by other cultural issues. Was the entityreally going to be run by the Germans? Would jobs be lost and facilities closed? InGermany, some shareholders questioned whether Chrysler s mass-marketproducts would tarnish the upscale image of the Mercedes brand. Others werestunned by the massive payouts made to American executives. In the US someshareholders Jewish in particular were upset that an American automaker wasbeing taken over by a company that played such an active part in the German waseffort half a century earlier (How the DaimlerChrysler merger flunked culturaltest, 2000). These issues represented a major communication challenge. Researchproves, that the company s communication strategy was not sufficient enough tomeet this challenge.


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May-December, 1998

The Economist published one article in this period on May9, 1998.

The story emphasizes that the Germans, like once Japanese are going to turn theworld s car industry upside down. It is notable, that DaimlerChrysler is notreferred to as the Americans and the Germans. The article makes a predictionthat the days of the rest of Europe s regional car groups are numbered. Chrysleris referred to as highly profitable and well-managed, lacking, however, theinternational clout of Mercedes.

The article, however, mentions that the question is, if the merger will

work. Differences between corporate cultures are emphasized. A prediction ismade, that Daimler will be tempted to impose its methods on Chrysler. However,the article emphasizes, that Daimler has much to learn from Chrysler smanufacturing skills.

In general, the article was favorable .Business Week had 4 articles: 3favorable and one neutral. The positive articles emphasize the same themes that

the one in The Economist. In particular, it is said, that the merger will clearly rockthe global car industry, and a new class of Euro-American corporation mayspring on the scene. Vlasik, the future author of Taken for a Ride, characterizesthe merger as a marriage made in automotive heaven. He says, In one boldstroke, the pending merger dramatically changes the landscape of the globalauto industry. The new company, according to Vlasic, will transform the way theauto industry operates worldwide. Positive notes are made regarding therelations between the company s CEOs. There are signs that Eaton and

Schrempp are bonding, reports Peterson. Analyzing Daimler-Chrysler MergerPortrayal 19 Schrempp s predisposition not to share a top job, he characterizesEaton as an executive who can ally with the German manager. In general, allarticles make positive forecasts for the merger. However, the significant culturaldifferences between the companies cultures are still emphasize.


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Janua ry- D ecembe r, 1999

The Economist published one article in 1999. It starts by emphasizing,that the merger is now looking like a no-premium takeover, with trouble ahead.

The "merger" was, according to the article, a takeover of America's third carcompany by Europe's biggest industrial concern. Most of the article deals withthe process of German managers taking control over the company. It alsoacknowledges the challenges of the merger, Although merging the twocompanies was never going to be easy, nobody expected it to be quite this hard.However, the article can be considered neutral, because it still emphasizes themerger s potential.

Business Week publishes 8 articles, 7 of which are neutral and 1 was nonfavorable. The common theme of the articles is the decreasing morale of Chrysler s employees and fears, rising that Stuttgart leadership will destroy thecreative spirit at Chrysler. Several articles focus on key Chrysler executivesleaving the company, due to the growing German dominance.

Another common theme is doubt in the merger to succeed. 'Thesecompanies always underestimate the level of cultural difficulties,'' says David E.Cole, director of the University of Michigan's Center for the Study of AutomotiveTransportation. ''They Daimler-Chrysler Merger Portrayal 20 always say we'll dealwith it up front, but they never do. Business Week concludes, that

DaimlerChrysler is not living up to its promise.


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Janua ry- D ecembe r, 2000

The Economist published 4 articles: 1 favorable, 1 neutral and 2 non-favorable. The favorable articles mentions that the Germans are satisfied with theprogress of the merger, emphasizing the point, that even at this early stage,however, the merger offers some powerful lessons in the problems of combiningfirms in different countries. The problems of the merger are downplayed,compared to the U.S. media: Difficulties were aggravated by a justifiable feelingamong those on the American side that this was no merger of equals, but rather adeal in which Daimler was calling the principal shots. The articles confirm,

Rumblings of discontent within the firm can still be heard. The discontent isportrayed as an exception: Viewed from outside Detroit, the merger seems tohave caused relatively few arguments.

The tone of the coverage changes after the November article in TheFinancial Times, where Schrempp confirmed, that he never intended this to be amerger of equals: the mood at the company is fast switching from concern to

panic. However, Schrempp s confession is called a candid interview, wherethe chess-playing German admitted that the image of a merger was merely a

feint. However, the tone changes dramatically a week after. The Economiststates, that the merger has so far failed disastrously. It acknowledges, that a biglesson of the merger is that Truth is always the best tool of management.Daimler's dealing with its American acquisition has been a tale of deceptionThere was much talk of "one company, two head Daimler-Chrysler MergerPortrayal 21 offices"--all of it nonsense. The Economist concludes, It is time forMr. Schrempp to payheed to the value he has destroyed. Business Weekpublished 8 articles: 3 non-favorable and 5 neutral. One of the themes of theneutral articles emphasized the idea that before the merger Chrysler was at thetop of its game. Articles questioned Chrysler s responsibility for dragging downthe German auto maker's profits.


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The main theme of the non-favorable articles was theconsequences of Shrempp s remark to The Financial Times in November. One

article starts with acknowledging that the German CEO lied about his intentionsfrom the very start, Employees at DaimlerChrysler's Chrysler Group were stillreeling from their first quarterly loss since the early 1990s when they found outthat DaimlerChrysler Chairman Jurgen E. Schrempp had lied to them allSchrempp recently told the Financial Times that he had never really intended forthe combined auto giant to be ''a merger of equals,'' as he said at the time. Headded that he chose to be ''misleading'' for ''psychological'' reasons. If he hadbeen honest, there would have been no deal, and he couldn't have made Chrysler

into just another Daimler operating unit. Business Week suggests, thatChrysler's biggest loss may well be the little goodwill left between management

and the troop

Conclusion

During the first period, May-December, 1998, according to the

findings of this research, The Economist published 1 article, which was favorable.Business Week published 4 articles: 3 favorable and 1 neutral. Daimler-ChryslerMerger Portrayal 22 During the second period, January-December, 1999,according to the findings of this research, The Economist published 1 neutralarticle. Business Week published 8 articles: 7 neutral and 1 non-favorable. Duringthe third period, January-December, 2000, according to the findings of thisresearch, The Economist published 4 articles: 1 favorable, 1 neutral and 2 nonfavorable.

Business Week published 8 articles: 3 non-favorable and 5 neutral.The total period included 6 articles from The Economist: 2 favorable, 2 neutral,


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and 2 non-favorable; and 20 articles from Business Week: 3 favorable, 13 neutral,and 4 non-favorable.

D iscussion

According to the findings of this research, the media coverage of theDaimler- Chrysler merger in the U.S. and in European media was different fromthe very start. It is necessary to mention, that the U.S. media coverage more thantripled the European coverage in quantity. However, more significant differenceswere found in the quality of the coverage. In 1998, when the merger wasannounced to the public, the media coverage of the deal was extremely

favorable. In both cases, predictions were made that the merger would changethe entire global auto industry. However, even at this point an importantdifference in portrayal should be mentioned. European media attributed itsoptimistic forecasts to the Germans: The Germans, like once Japanese are goingto turn the world s car industry upside down. The role of the American side wasdownplayed to sharing its manufacturing skills.

In 1999 and the first half of 2000, the merger is portrayed more or less inthe same manner by both, the U.S. and European media. Differences in corporatecultures are emphasized. However, were the U.S. media emphasizes the concernsof the Chrysler side, the European media, almost neglects them: Viewed fromoutside Detroit, the merger seems to have caused relatively few arguments. Thesituation changes dramatically after Schrempp, the German DaimlerChrysler CEO,mentions in an interview to The Financial Times, that He had never really

intended for the combined auto giant to be ''a merger of equals,'' as he said at thetime. He added that he chose to be ''misleading'' for ''psychological'' reasons.Both, the U.S. and European Daimler-Chrysler Merger Portrayal 24 media,acknowledge, that this remark caused even more disappointment among Chrysleremployees.


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But still, the European media refers to Schrempp as to a chess-playerwho made this remark in a candid interview. The US media, on the contrary,

states, that the German CEO lied about his intentions from the very start. Thedifference in tone is astonishing. In the European article, Schrempp is astrategically thinking manager, whose decisions are psychologically justified. TheU.S. article refers to the German as to a liar, who destroys the little goodwill leftbetween management and the troops.

However, at the end of 2000, the European media catches up with the

U.S. media in portraying the merger as a disastrous failure. It also acknowledgesthe damage caused by Schrempp and suggests his soon-to-come resignation: It istime for Mr. Schrempp to pay heed to the value he has destroyed. If he cannotget Chrysler working and revive the share price soon, he should go.

Daimle r

2007 Pr o

f it

Rises

Mercedes-Benz maker, Daimler AG and the world s second-largestmaker of luxury vehicles reported profits in its fourth-quarter results for 2007.The good results this quarter have come after selling the Chrysler division in theU.S. and cutting jobs at Mercedes-Benz Cars. Without Chrysler, Daimler reportedprofits of 1.7 billion euros (1.3 billion) for the fourth quarter and a net profit of 4billion euros for the year (3.8 billion euros in 2006). Sales rose to 99.4 billioneuros ($144.98 billion) from 99.2 billion euros, with 2.1 million automobiles soldglobally. In May last year, after a decade of disappointing results, Daimler finallysold Chrysler to private equity firm Cerberus Capital for 3.74 billion.


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With the North American car and truck market struggling this year fromthe impact of falling house prices in the wake of the sub-prime crisis, Daimler isbanking on demand from China, India and Russia. Daimler, the Stuttgart-basedcompany expects the North American truck market to recover in the second half of the year.

D aimle r Ch ry sle r M e r ge r Failu r e

In 1926, the merger of two German automobile manufacturers Benz &Co. and Daimler Motor Company formed Stuttgart-based, German companyDaimler-Benz. Its Mercedes cars were arguably the best example of Germanquality and engineering.

In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two leadingglobal car manufacturers, agreed to combine their businesses in what wasperceived to be a merger of equals . Jurgen Schrempp, CEO of Daimler-Benz andRobert Eaton, Chairman and CEO of Chrysler Corporation met to discuss thepossible merger.

The merged entity ranked third (after GM and Ford) in the world interms of revenues, market capitalization and earnings, and fifth (after GM, Ford,

Toyota and Volkswagen) in the number of units (passenger-cars and commercialvehicles combined) sold. In 1998, co-chairmen and co-CEOs, Schrempp and Eatonled the merged company to revenues of $155.3 billion and sold 4 million cars andtrucks. But in 2000, it suffered third quarter losses of more than half a billiondollars, 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 atits ailing Chrysler division.


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D aimle r, Ch ry sle r and cultu r al di ff e r ences

The Daimler Chrysler merger proved to be a costly mistake for boththe companies. Daimler was driven to despair, and to a loss, by its merger with

Chrysler. Last year, the merged group reported a loss of 12 million euros.

Analysts felt that though strategically, the merger made goodbusiness sense. But contrasting cultures and management styles hindered therealization of the synergies. Daimler-Benz attempted to run Chrysler USAoperations in the same way as it would run its German operations. Daimler-Benzwas characterized by methodical decision-making. On the other hand, the USbased Chrysler encouraged creativity. While Chrysler represented American

adaptability and valued efficiency and equal empowerment Daimler-Benz valueda more traditional respect for hierarchy and centralized decision-making.

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A failed merger can be understood in two ways: Qualitatively,whatever the companies had in mind that caused them to merge in the first place

doesn t work out that way in the end. Quantitatively, shareholders suffer becauseoperating results deteriorate instead of improve.

Studies reveal that approximately 40% to 80% of mergers andacquisitions prove to be disappointing. The reason is that their value on the stockmarket deteriorates. The intentions and motivations for effecting mergers andacquisitions must be evaluated for the process to be a success. It is believed thatwhen two companies merge the combined output will increase the productivity of the merged companies. This is referred to as economies of scale. However, thisincrease in productivity does not always materialize.

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Here s a list of notorious failed mergers that evaluated in one way oranother: AOL/Time Warner, HP/Compaq, Alcatel/Lucent, Daimler Benz/Chrysler,Excite/@Home, JDS Uniphase/SDL, Mattel/The Learning Company,Borland/Ashton Tate, Novell/WordPerfect, and National Semiconductor/FairchildSemiconductor.


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Some failed so spectacularly that the combined company went downthe tubes, others resulted in the demise of the executive(s) that mastermindedthem, some later reversed themselves, and others were just plain dumb ideasthat were doomed from t he start.

R easons f o r m&a f ailu r e

There are several reasons merger or an acquisition failure. Some of the prominentcauses are summarized below:

If a merger or acquisition is planned depending on the (bullish)

conditions prevailing in the stock market, it may be risky .There are times when amerger or an acquisition may be effected for the purpose of seeking glory,rather than viewing it as a corporate strategy to fulfill the needs of the company.Regardless of the organizational goal, these top level executives are moreinterested in satisfying their executive ego.

In addition to the above, failure may also occur if a merger takesplace as a defensive measure to neutralize the adverse effects of globalization

and a dynamic corporate environment. Failures may result if the two unifyingcompanies embrace different corporate cultures.

It is traditional to assume that acquisitions fail. In 1987, Harvardprofessor Michael Porter observed that between 50 and 60% of acquisitions werefailures. There have been several other studies since then, and the results havecontinued to support his conclusions. In 1995, for example, Mercer ManagementConsulting noted that between 1984 and 1994, 60% of the firms in the BusinessWeek 500 that had made a major acquisition were less profitable than theirindustry. In 2004, McKinsey calculated that only 23% of acquisitions have apositive return on investment. Academic research in strategy and businesseconomics have taken these conclusions further, suggesting that acquisitionsdestroy value for the acquiring firm s shareholders, although they create value forthe shareholders of the target firm, something that was confirmed by a recent


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study carried out by the Boston Consulting Group (2007). Of course results varydepending on the type of acquisition, the similarity of the two protagonistsindustry, the international or domestic nature of the operation, etc., but theoverall trend remains the same.

It would not be correct to say that all mergers and acquisitionsfail. There are many examples of mergers that have boosted the performance of acompany and addressed the well-being of its shareholders. The primary issue tofocus on is how realistic the goals of the prospective merger are

Companies merge when, for one reason or another, theirstrategic plans indicate they should. That being the case, there must also beoperating synergies between the two companies. In a nutshell, that means thewhole will be financially healthier than the sum of the parts. Said differently, atsome point after the merger is complete and the companies are integrated withredundant functions eliminated, shareholder value increased. It s that simpletheoretically.

A pa r t f r om the above mentioned r easons , given below a r e

some mo r e r easons which r esult in f ailed me r ge r s:

Lack of Communication Lack of Direct Involvement by Human Resources Lack of Training Loss of Key People and Talented Employees


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Loss of Customers Corporate Cultural Clash Power Politics Inadequate Planning

While it is true that some of these failures can be largelyattributed to financial and market factors, many studies are pointing to theneglect of human resources issues as the main reason for M&A failures. A 1997PricewaterhouseCoopers global study concluded that lack of management andrelated organizational aspects contribute significantly to disappointing post-merger results.

Provided that they have equal or less information than theirmanagement, shareholders of each firm accept the merger agreement. Themerger goes then ahead and fails. This happens because the obtained synergygains do not compensate the costs of merging.

Accordingly, these mergers are unprofitable. Share prices, on theother hand, can rise at the moment of the merger announcement if markets do

not have merging firms private information about the synergy gains.

A majority of corporate mergers fail. Failure occurs, onaverage, in every sense: acquiring firm stock prices tend to slightly fall when

mergers are announced; many acquired companies are later sold off; andprofitability of the acquired firm is lower after the merger (relative to comparablenon merged firms).

One of the main difficulties in measuring acquisitionperformance lies in the assessment methods used. These methods include


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measuring the stock market reaction, valuing the whole entity after acquisition,abnormal returns, synergies and economies of scale, to name just the mostcommon. However, they all lack the capacity to isolate the sole impact of theacquisition on the firm s value from the plethora of events that occur in thesecircumstances. When one assess the stock market reactions to an acquisition overa 180-day window, a number of other events have impacted on the share valueduring this period. At best these methods allow us to measure the financialmarkets short-term reaction.

Many business commentators are now acknowledging that failuredoes not have its roots simply in financial, monetary and legal issues but in lack of intercultural synergy. Research suggests that up to 65% of failed mergers and

acquisitions are due to people issues , i.e. intercultural differences causingcommunication breakdowns that result in poor productivity.

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performance, indicating that the turnover was not due to the pruning of underperforming management at the acquired firm.

Following the merger, the stock price fell by roughly one half

since the immediate post merger high. The Chrysler division, which had beenprofitable prior to the merger, began losing money shortly afterwards and wasexpected to continue to do so for several years. In addition, there were significantlayoffs at Chrysler following the merger (that had not been anticipated prior tothe merger. Differences in culture between the two organizations were largelyresponsible for this failure.

Operations and management were not successfully integrated asequals because of the entirely different ways in which the Germans and

Americans operated: while Daimler-Benz s culture stressed a more formal andstructured management style, Chrysler favored a more relaxed, freewheelingstyle (to which it owed a large part of its pre merger financial success). Inaddition, the two units traditionally held entirely different views on importantthings like pay scales and travel expenses. As a result of these differences and theGerman unit s increasing dominance, performance and employee satisfaction atChrysler took a steep downturn. There were large numbers of departures amongkey Chrysler executives and engineers, while the German unit becameincreasingly dissatisfied with the performance of the Chrysler division. Chrysleremployees, meanwhile, became extremely dissatisfied with what they perceivedas the source of their division s problems: Daimler s attempts to take over theentire organization and impose their culture on the whole firm failed.

While cultural conflict often plays a large role in producingmerger failure, it is often neglected when the benefits of a potential merger areexamined. For instance, following the announcement of the AOL Time Warnerdeal, a front-page Wall Street Journal article (Murray et al. 2000) discussedpossible determinants of success or failure for the merger (such as synergies,


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costs, competitor reaction, and so forth). The only clear discussion of possiblecultural conflict is a single paragraph (out of a 60-column-inch article) revealinghow the different personalities of AOL s Steve Case and Time Warner s GeraldLevin reflect cultural differences between the two firms. A similar article includeda single paragraph entitled What could go wrong with the synergy strategy.Moreover, in these sorts of short, cursory, obligatory discussions of possiblecultural conflict, there is rarely discussion of what steps might be taken if there isdramatic conflict. While culture may seem like a small thing when evaluatingmergers, compared to product-market and resource synergies, we think theopposite is true because culture is pervasive. It affects how the everyday businessof the firm gets done whether there is shared understanding during meetingsand in promotion policy, how priorities are set and whether they are uniformlyrecognized, whether promises that get made are carried out, whether the mergerpartners agree on how time should be spent, and so forth.

The guiding hypothesis is that an important component of failure is conflict between the merging firms cultural conventions for takingaction, and an underestimation by merger partners of how severe, important, and

persistent conflicts are. Cultural conventions emerge to make individual firmsmore efficient by creating a shared understanding that aids communication andaction. However, when two joined firms differ in their conventions, this cancreate a source of conflict and misunderstanding that prevents the merged firmfrom realizing economic efficiency

Such discourse is highlighting the need for more interculturaltraining both within the framework of mergers and acquisitions and for keypersonnel such as managers and HR departments. In both instances culture isbeing ignored rather than being embraced and used positively.

Piero Morosini emphasizes that, misunderstood nationalcultural differences have been cited as the most important factors behind thehigh failure rate of global JVs [joint ventures] and alliances. Morosini argues thatwhen intercultural differences are ignored during the evaluation and negotiation


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stages of a merger, integration inevitably fails. He adds that the manner in whichan organization handles intercultural challenges is directly correlated with theperformance of the merger in the post-integration stage and can mean thedifference between long-term success or failure.

If intercultural understanding is to be recognized within thesystems of processes of mergers and acquisitions, staff training is critical. It is theleaders, managers and HR personnel of companies that must have interculturalcompetency. However, it appears that companies are not investing enough inintercultural, or for that matter any, training. In the Business Energy Survey,where 1,500 managers were surveyed, only a third had received training in thelast 12 months. If management is receiving such low levels of support one can

assume that other functions are receiving as much or even less.

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Despite months of work, millions of dollars in fees, and a firmconviction that the transaction makes all the sense in the world, your merger isgoing down in flames. The two cultures are not meshing. Key talent is heading forthe door. And everyone knows it.

One of the solutions put forward by researchers is to studyacquisition survival. An acquisition is regarded as successful if, over a certainperiod of time (generally several years), it has remained in the hands of theacquiring firm. Studies on survival confirm the previously obtained results, inother words a failure rate of between 50 and 75%. Divestment as a successcriterion poses a major problem, however: if an acquisition is sold off at the endof 4 years with a large profit, can we really consider it as a failure? Obviously not.

There are some transactions, such as the marriage of HP andCompaq, which are troubled from the start. There s little anyone can do.Fortunately, this is far from the norm. More than two-thirds of transactions thatfail do so at the execution stage. DaimlerChrysler, for example, neglected early onto establish a proper set of guiding principles based on the merger s strategic


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intent, and then continued to misfire by failing to align leadership and integratethe cultures of the two organizations.

Bringing disparate groups of people together as one company

takes real work and represents an effort that is often largely overlooked. Culturechange management is not indulgent; it is a critical aspect of any transaction.However, simply acknowledging the issue or handing it off to specialists is notenough. Management must set a vision, align leadership around it, and holdsubstantive events to give employees a chance to participate. Detailed actionsand well articulated expectations of behavior connect the culture plan to thebusiness goals.

Companies must start to become more aware of thesedeficiencies and their possible future impacts. If the mergers and acquisitions of the future are to prove fruitful, companies must design and implementcomprehensive intercultural training programs for staff; assess and tackle possibleareas of intercultural difficulties prior to, during and after mergers and put intoplace mutually agreeable intercultural frameworks of understanding to act asguidelines for post-merger synergy.

These tasks should not be seen as reactive, damagelimitation exercises but as a positive, proactive means of creating cohesion,maximizing efficiency and building a competitive advantage.

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