What determines the Success of Mergers?

von: Maria Kimme

Table of Contents

1. Introduction  page 3

2. The Determinants of a Merger’s Success  page 4

2.1 The Consideration of “Hard Facts”  page 4
2.2 The Consideration of “Soft Facts”  page 4
2.3 Overcoming Difficulties  page 5

3. The Merger between Daimler-Benz AG and Chrysler Corp.  page 6

3.1 The Due Diligence before the Merger  page 6
3.2 The Integration After the Merger  page 7
3.3 The Effects of the Merger on DaimlerChrysler’s Stakeholders  page 7

4. Conclusion  page 9

5. Reference List  page 10

1. Introduction

Every week, if not more often, the financial press reports intentions of firms to merge. If we hear the notation “mergers and acquisitions”, various names of companies will come to our minds, such as Mannesmann and Vodafone, Volkswagen and Audi, Daimler-Benz and Chrysler, to name just a few. Some of those can be considered successful, while others represented a disaster to stakeholders. Employees were laid off, plants closed, supplier relationships cancelled, customers confused, and, most of all, shareho lder value destroyed. In 2000, 83% of all mergers did not generate benefits to the stockholders, 50% even produced losses. This situation gives rise to many questions. Mainly, it has to be clarified, what the underlying reasons of those failures to create stockholder value are. Connected with this is the discussion about the corporate cultures of the two merging companies and the influence of their differences on the outcome of the merger. Especially interesting in this matter, is the distinction between hard and soft facts in the merging companies. The underlying patterns will be clarified and the connection will be explained with the example of the fusion of Daimler-Benz AG and Chrysler Corp. on November 17th in 1998.

This paper will continue with the definition and description of hard and soft facts to be considered when approaching a possible merger. It will describe, how the soft facts can overshadow any possible benefit arising from the hard facts, if managed poorly. After that, some solutions will be provided, in order to overcome arising difficulties. To underline those theoretical thoughts, the case study of DaimlerChrysler will be provided and applied. Concluding, this paper will provide an answer on the above mentioned question.

2. The Determinants of a Merger’s Success

2.1 The Consideration of “Hard Facts”

Before companies pursue a merger, many aspects have to be considered. Among those factors are the compatibility of the two (or more) considered companies, the affect on the involved industry, the modification of the companies’ structures, and therefore also the affect on the firm’s stakeholders. A business’ stakeholders consist of the employees, the customers, the suppliers, the government, and the stockholders. The ritual behind those considerations is called due diligence, which describes the “investigation of the true, correct and complete character of a company’s legal matters, its historic, current and projected internal and external financial statements and the company’s historic, current and projected business and operations” (Duncan, 1989: 231). In other words, the internal and external environment of the merging companies will be audited and strengths, weaknesses, opportunities, and threats closely monitored. The outcome of this analyses should be that the projected financial results of the merged company will be higher than the sum of the projected financial results of the separate firms. Oster acknowledges this argument with six statements.1 Reasons for mergers are, according to him, the rise in the acquired firm’s assets, entry time considerations, industry capacity issues, ways to enter foreign markets, undervalued assets, and tax considerations. Those mentioned factors can all contribute to the value premium above the sum of separate financial results.

But even if those circumstances are proven and regarded to generate a favorable outcome of the merger, some different aspects have to be reflected upon as well. The above disclosed factors can be summarized by the notation of “hard facts”. As the description suggests, there is also the contrary existing, namely the “soft facts”, which will now be considered.

2.2 The Consideration of “Soft Facts”

Especially noteworthy in this context is the corporate culture. Culture is the set of values, guiding beliefs, understandings, and ways of thinking that is shared by members of an organization and taught to new members as correct (Duncan, 1989). Organizational culture exists at two levels. On the surface are visible artifacts and observable behaviors. These are the ways people dress and act and the symbols, stories, and ceremonies organization members share. The visible elements of culture, however, reflect deeper values in the minds of organization members. These underlying values, assumptions, beliefs, and thought process are the true culture (Schein, 1990). Culture provides members with a sense of organizational identity and generates a commitment to beliefs and values that are larger than themselves. This then creates a feeling of integr ity and may very well result in a competitive advantage of the firm.

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1 Oster, S., Modern Competitive Analysis, p. 224-231