Merger and Acquisition

In this day and age, mergers and acquisitions play an important role in corporate finance. For many companies, mergers and acquisitions are a source of external growth when primary growth is not possible, whereas to other companies they represent a constant threat to their continuing independent existence. Merge can be explained as a friendly negotiated deals between 2 organization into a new organization while acquisition means that a takeover of one company’s ordinary share capital by another company, financed by cash or issue shares. Why mergers and acquisition will occur in the financial world? It is because of synergy which the executives believe that the combined organization will have a greater value than the sum of its parts.

Here is the formula for synergy:

                 PV_AB = PV_A + PV_B + Gains

Today I will talk about the largest merger between Chrysler, a car industry from America and Daimler, another car industry from Germany which is happened in 1998. Chrysler is one of the car industries that have the 3^rd ranking in the United States car-maker. Besides, it is known for “block-buster” products because their best-selling vehicles are Minivan and Chrysler Jeep Grand Cherokee. Chrysler are risk takers in term of design, finance and manufacturing, it is quick and nimble where it can produce 2.2 million cars per year.  Meanwhile, Daimler- Benz is a car industry that produce high-end car in Germany which was very different from Chrysler. It has a strong historic roots and powerful heritage in the market. Daimler- Benz is a complex company structure with a holding company, a much diversified group including train; airline and car production and they are all run as autonomous business units which each have its own chairman and management board. Mercedes is one of the famous and profitable products around the world. Can this two large company that have big different succeed in the merging process? Well, not everyone will agree with merge and acquisition because they will afraid of losing their jobs and takeover by the stronger company. In this case, Daimler Benz is the powerhouse behind of the merger negotiation. Indeed, the board member of Chrysler will definitely worry about this merger process because it sounds like an acquisition instead of merge.

 However, the merge between these two companies was announced in 7 May 1998. In my point of view, I would say this merger as a vertical merger because the combination of two companies operates at different stages of production within same industry. It is because Jurgen Schrempp, CEO of Daimler Benz said no to platform sharing because this would be a merger without dilution of brands. After the merge, Daimler Chrysler started to face problems because there was confusion between merger management and operational management. Daimler Chrysler is excluded from the Standard & Poor 500 because the head-quartered is located in Germany. In this case, would Daimler Chrysler be a German company or American company? What about the conflicts of taxation and national pride for this company? Eventually, Daimler Chrysler did not perform well in the market where it did not make any profit for their first year and the new productions of Minivan from Chrysler were remaining unsold. At this point, Schrempp started to lose confident with Chrysler because he realized that Chrysler was losing control in the U.S market and the German management made a mistake of not taking this problem serious in the early time. However, Schremmp decided to take a drastic action by restructuring, downsizing and refocusing on Daimler Chrysler.

After all, I personally think that merger and acquisition between two companies may help them to expand their value of the organization. However, there are also a lot of limitations like culture, communication between employees, senior management were inaccessible that will cause the failure of M&A. Please drop some comment and tell me what you all think about merge and acquisition.

Cheers