1. DO MERGERS CREATE VALUE IN
AUTOMOBILE INDDUSTRY
1

2. THE JOURNEY SO FAR …
Mergers and acquisition (M&A)
The automobile industry
M&A in the
automobile industry
Do mergers
create value ?
Daimler
Chrysler
2

3. WHAT IS VALUE ? …
Cumulative abnormal
returns
Managers’
assessments
Divestment data
Expert informants’
assessments
Post-Merger
performance
Early measures ….
3

4. WHAT IS VALUE ? …(CONTD.)
Accounting
based
measures
Stock
market
based
measures
Managers
subjective
assessment
Post – Merger
performance
Current measurement methods….
4

5. DO MERGERS CREATE VALUE ?...
What does the literature say
• Abnormal returns in the short
run
Target
Firm
• Value restricted to few
success stories
• Contrasting results
• On an average – no value
created
Acquiring
firm 5

6. SNAPSHOT OF THE AUTO INDUSTRY
Largest manufacturing industry
Capital intensive
High barriers to entry
Highly consolidated industry 6

7. TRENDS IN THE AUTO INDUSTRY
Consolidation
Overcapacity
Technology
Consumer demands
Lean and green production 7

8. COMPANY SELECTION
 Universe of mergers from 1996 – 2010.
 Ranking by transaction size
 No restructuring, no partial stakes, true merger and acquisitions
 Daimler Chrysler ‘ Merger of Equals’
 Daimler Chrysler – 3 phases
8

9. THE CHRYSLER CORP. STORY
 Originally known as Maxwell Motor Company
 Walter Chrysler pioneered the change
 Computer based Unibody design
 Hasty decisions followed to hit the company
financials
 Chrysler Corporation Loan Guarantee Act, 1979 for
USD$ 1.5 billion
 Diversified business in 1988, acquisitions reducing
working capital to USD$ 1.7 billion
9

10. CHRYSLER PERFORMANCE PRE-MERGER…
25575
33548
40831
49363 49601
57587 56986
22922
28396
32382
38032
41304
45842 46743
854 902
4677
6767
4444
7099
5563
0
12005
16093
18864 19657
24057
25708
0
10000
20000
30000
40000
50000
60000
70000
1991 1992 1993 1994 1995 1996 1997
Revenues
COGS
Operating Income
Current Liabilities
10

11. CHRYSLER PERFORMANCE PRE-MERGER…
-1.64
1.11
-3.81
5.06
2.68
4.83
4.15
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
1991 1992 1993 1994 1995 1996 1997
Basic EPS
Basic EPS
11

12. DAIMLER
 Founded in the year 1886 by Gottlieb Daimler and
Carl Benz
 Personal mobility in 200 countries and 35 operating
units
 Financial Dilemma of 1995
 New Chairman and his ownership: Jurgen
Schrempp
 Restructure and Realignment
 Expansion Plans - Merger
12

13. RESULTS OF CHANGE IN STRUCTURE
-20000
0
20000
40000
60000
80000
100000
120000
140000
1991 1992 1993 1994 1995 1996 1997 1998
Revenue
COGS
Operating Income
Current Liabilities
13

14. `
-15
-10
-5
0
5
10
15
20
25
30
35
1992 1993 1994 1995 1996 1997
Basic EPS
Basic EPS
14

15. MOTIVATIONS FOR MERGERS
 Daimler’s Dilemma
- Entry into U.S domestic market
 Chrysler Puzzle
- European presence
 Daimler & Chrysler
- Match made in heaven
Synergy Equation
Daimler AG
(2)
Chrysler
Corporation
(2)
Daimler
Chrysler AG
( 5)
15

16. THE MERGER OF ‘EQUALS’
Structure of the transaction
• 1 Daimler = 1 Daimler Chrysler ( DCX)
• 0.45 Chrysler Corporation = 1 Daimler Chrysler ( DCX)
Deal closed in 200 days
• May 6, 1998, merger agreement is signed
• 17th November the stock starts trading
First global share
• 21 markets all over the world
• DCX was no longer a part of S&P 500
16

17. DAIMLER-CHRYSLER POST MERGER
PERFORMANCE
Return on Equity
Profitability
• EPS
• EBIT/share
• Operating margins
• R&D/ sales
• R&D/EBIT
• CFO/Share
Efficiency
• Total asset utilization
• Fixed asset utilization
17

18. SHAREHOLDER VALUE - ROE
Still below pre-
merger levels
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Daimler Chrysler
18

19. PROFITABILITY - EBIT/SHARE
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Daimler Group Daimler division Chrysler / division 19

20. PROFITABILITY - R&D/ SALES & R&D/EBIT
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Daimler Daimler division Chrysler Division
-600.00%
-400.00%
-200.00%
0.00%
200.00%
400.00%
600.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Daimler Daimler division Chrysler Division
20

21. CASH FLOW/SHARE
12.00
13.00
14.00
15.00
16.00
17.00
18.00
19.00
20.00
1995 1996 1997 1998 1999 2000 2001 2002 2003
Cash Flow Per Share - Daimler
21

22. EFFICIENCY- FIXED ASSET TURNOVER
22
1.1x
2.1x
3.1x
4.1x
5.1x
6.1x
7.1x
8.1x
9.1x
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Daimler Chrysler

23. CULTURAL CLASH
 Dominance of Daimler over Chrysler
 Power and conflict
 Difference in compensation policies, travel
expenses
 Conflicting goals among newly merged
departments
 Dividend payments germanised
 Structured Management V/S Permissive
23

24. DAIMLER AG AFTER DEMERGER
(8.0%)
(3.0%)
2.0%
7.0%
12.0%
Return on Assets % Return on Equity % Net Profit Margin % EBIT Margin
2008
2009
2010
(3.0)
(2.0)
(1.0)
0
1.0
2.0
3.0
4.0
5.0
2008 2009 2010
EPS
Dividends
24

25. ETHICAL CONSIDERATIONS & LIMITATIONS
 Due to time constraints we could consider only one
unsuccessful merger for our research
 We relied on S&P Capital IQ for financial data and
were unable to check every line item with SEC
filings
 Our research data is secondary
25

26. CONCLUSIONS
 Mergers should be evaluated for their performance
in the long run rather than in the short run.
 Large automobile companies have legacy costs
and hence mergers in these companies fail to
create value in the long run.
 Quantitative factors vs. Qualitative factors.
 International diversification and product portfolio
diversification might not work
26

27. THANK YOU
 Special thanks to our mentor Dr. Parvinder Arora
and Dr. Veena Jadhav for providing
guidance, mentorship and facilitation for this
research.
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