Report Author: Aaron Bartels
Book Summary
In April 1995, Kirk Kerkorian (Billionaire investor) and Lee Iacocca (former Chrysler CEO) tried to lead a leveraged buyout of Chrysler Corporation at $55/share for a stock trading at $40/share. Kerkorian thought he had Eaton (Chrysler’s CEO) and Chrysler management’s support. But the board responded stating that the company was not for sale. The company pursued an aggressive defensive strategy to prevent Kerkorian’s offer from gaining any traction by leading a PR campaign against Kerkorian, using its leverage with financial institutions to refuse to do business in the future with any bank that backed Kerkorian and listening to what Werner (CEO of Mercedes Benz) had to say about a joint venture to accelerate the international expansion of each company. Werner smelled an opportunity with the Kerkorian incident and felt the longer it drug on, the better the chance Chrysler would do something out of desperation. But Werner failed to engage Schrempp (Daimler-Benz CEO) who squashed the idea when he heard about it. With Mercedes out of the picture, Chrysler struck a deal with Kerkorian. Chrysler gave Kerkorian one board seat, agreed to buy back $2B in stock in 1996, $1B in 1997, and agreed to pay Iacocca ½ the amount due for options which were rescinded when Iacocca joined forces with Kerkorian a violation of his exit package with Chrysler. In exchange, Kerkorian agreed to not buy any more Chrysler stock, not start a proxy war, and not to say a single bad word about Chrysler to the press for a period of 5 years.
In mid 1997, automotive industry studies showed that at current rates, overcapacity in five years would be equivalent to 6 Chrysler companies. Therefore, the industry was primed for a race toward consolidation. In 1996, Schrempp successfully lead the integration of Mercedes into Daimler and had ousted Werner. With complete control over Daimler and Mercedes, Schrempp had determined Daimler was ready to pursue merger partners and that Chrysler was the best available partner. Based on what happened with Kerkorian, Schrempp knew the first contract would need to be friendly. York and Kerkorian had noticed that European automotive companies were trading at a multiple much higher than American companies. Diamler Benz kept jumping out to them as an opportunity for Chrysler to deliver value to its shareholders. York and Kerkorian took the idea to Eaton.
At the 1998 North American auto show, Chrysler was clearly off its game. In past auto shows, Chrysler had been the class of the field. But in 1998, it was clear that European companies like BMW, Volkswagen, Mercedes had all the good stuff. Schrempp first reached out to Eaton at the 1998 North American auto show about a possible merger of equals. Chrysler made it clear at the beginning that the following points were non negotiable – the management team would be made up of executives of both Chrysler and Daimler and Chrysler shareholders would receive a premium over the current value of the stock price. Schrempp required the merged company be a German entity and slyly dodged discussions of the name until the end of the negotiation. Germans had a way of not commenting on negotiation points giving the Americans the impression that they had silently agreed to the point. But the Germans would re-surface the point when the time was right for them to get their way, frustrating the Americans by resurfacing points they thought had been agreed to. After months of work by many members of each team, Eaton and Schrempp one-on-one worked out the details of the final negotiation points with a calculator. The market reacted very favorably to the deal when finally announced, with the stock jumping 30% in the first few months.
Eaton made huge strategic mistake at the announcement of the deal when he stated he would step down first as CEO once the merger was complete. This immediately turned him into a lame duck and gave Schrempp and the German team an upper hand in all merger works going forward. The merger of equals quickly turned into the Schrempp takeover show as the Germans and their methodical approach to preparation, took the upper hand over the Americans in every aspect of the deal. The Americans were under prepared, outnumbered and clearly out of their element. Schrempp and the Germans were always a step ahead, planning their next move, while everyone else was still trying to figure out the last one. With the six hour time difference, the Germans were finishing lunch when the Americans were arriving at work making Stuttgart seem like it was always ahead of Auburn Hills. When speaking in public, Eaton typically spoke first about general broad issues about the economy and global integration while Schrempp would speak second talking about Daimler Chrysler hard issues, strategy, and making comments on the company’s performance outlook.
The six month earnings announcement by Daimler Chrysler was not what the analyst were expecting. The stock dropped almost 40% from its highs a few months earlier. The American’s were not only overwhelmed with the overpowering Germans, but were having to deal with succession planning at CEO (from Eaton to Stallkamp to Holden) and a economy that turned very weak in 2000. Holden did not last long as CEO as the Germans refused to accept that the 2001 economy, not Chrysler would drive Chrysler’s 2001 earnings. With Holden, out, a German, Zetsche was brought in to finally give Schrempp the control he wanted over Chrysler.
The euphoria of the Daimler Chrysler deal never materialized. In the end, it simply bound two companies into one and in the end gave the Germans control over an American icon.
Major Points Made By Author
- The Perfect Storm – There’s only one way to survive the perfect storm. Don’t go there! Don’t be at that place in the ocean where the three storms come together. Think ahead. Heed the warning. Be somewhere else.
- Know who you do business with – Eaton and the Chrysler executives/shareholders never knew what Schrempp and Daimler-Benz true intentions with Chrysler were. Schrempp – “Me being a chess player, I don’t normally talk about the second or third move. The structure we have now with Chrysler was always the structure I wanted. We had to go a roundabout way, but it had to be done for psychological reasons. If I had done and said Chrysler would be a division, everybody on their side would have said: ‘There is no way we’ll do a deal.’ But it’s precisely what I wanted to do. From the start structure, we have moved to what we have today”.
- Preparation, Hard Work and Vision Matter - There is no substitute to preparation, hard work and having a vision of where want to go. The Daimler executives and the Germans bullied around the Chrysler executives and the Americans. The Germans worked together as a team, were always more prepared and rehearsed. The Americans worked independently per their own agendas, and were often walking in on German meetings already taking place. The Germans acted like they were in control and were.
- Don’t Underestimate the Political Environment - When trying to get initiatives accomplished in corporate environments, it often matters more who owns the idea, how engaged they are in the idea development process, and what the idea means to their future, not necessarily how much merit the idea may have for the company’s future. When Werner engaged Chrysler about a joint venture in 1995 without engaging Schrempp, Schrempp squashed it, tearing the deal apart point by point. However, when Schrempp decided to purse Chrysler 2 years later, it was a great idea. The difference between the deals is what was in each for Schrempp. Had Werner gone forward with the deal with Mercedes, Schrempp would have lost power as CEO of Daimler. With Werner out of the way, Schrempp had sole control over Daimler Benz and had the opportunity to build his empire by acquiring Chrysler.
- When negotiating, whoever lays the ground rules, sets the stage for the rest of the discussions. Ground rules can be biased toward one side and can therefore shift the balance of power. The Germans set the field for the negotiations with the Americans over Chrysler and took control of the discussions from the start.
- Don’t reveal your hand too early in the process. Eaton announced he would step down as joint CEO of Daimler Chrysler as soon as the merger was complete. This announcement gave Schrempp all the power and control through the integration of the companies.
How Are Major Points Applicable To Self
- Have a plan on where you want to go
- There is no substitute to being prepared. Which every party is best prepared will typically win
- Remember Kotter’s 8 steps when tackling change projects
- Remember to consider the political scene
- Know/watch your partners, but know/watch your enemies even closer
- When it comes time to make a deal, the fewer participants, the more progress that can be made.
- At the end of the day, a deal really boils down to a couple key points. The sooner these can be set out on the table, the sooner have a chance to make the deal happen.
How Are Major Points Applicable To Group
- See Above
Recommended Other Readings
- The Perfect Storm
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