Winston Churchill once cautioned, “Those that fail to learn from history, are doomed to repeat it." So today we’ll take a quick look at one of the most famous M&A disasters in history as a means to keep us focused on skills and insights for future integration success. And I’d be willing to bet that in spite of all the media coverage this deal has received over the years, you’ve never heard the biggest mistake Daimler made…
Background on the Deal
Upon announcement in 1998, this deal was hailed by many analysts as a slam-dunk winner. It was a textbook example of a global, scale-enhancing, industry consolidation play with a unique market-segment extension opportunity to reach all principal auto-buyer segments from one single manufacturer. With $8 billion in anticipated cost synergies and a ground-breaking combination of legendary brands, what could possibly go wrong?
"Instead of preserving and leveraging Chrysler’s unique competitive advantage, Daimler’s consolidation mindset ... destroyed the company.”
Background on Chrysler Pre-Deal
Most folks have forgotten that Chrysler was quite a prize. At the time of the deal, it was the most profitable auto company in the world. Revenues were at an all-time high, driven by segment leaders such as the Jeep Grand Cherokee and the Dodge Ram. Chrysler boasted a 23% market share in the U.S., a superstar leadership team and $7.5 billion in cash on hand – enough to weather any down cycle without the need for a bailout. From a cultural standpoint, Chrysler’s celebrated leadership had brought the company back from the brink of bankruptcy on multiple occasions, and their “can-do” culture was based on strength, not just survival.
Then What Happened?
Here’s the part that everyone knows. A constant stream of bone-headed integration mistakes erupted into an all-out civil war between the two organizations and their respective leadership teams. If you are interested in an excellent, brief account of these issues, one of my favorite articles on this deal is this case study published by the Tuck School of Business at Dartmouth. In sum, here are the most commonly cited failure factors:
- Betrayal of expectations. After consistently communicating this as a “merger of equals” for two years, then CEO Jurgen Schrempp was quoted in a Financial Times article saying that this was a mere “PR device” and that Daimler had always intended the deal as an outright acquisition.
- Deadlock on key operational and integration issues. Delay, ambiguity and failure by leadership to provide directional guidance on key issues allowed well-intentioned function leaders to butt heads and lose traction at almost every critical juncture.
- Cultural flashpoints. Let’s just say this aspect is a case study in and of itself. My favorite cultural war story has to do with how the new executive team ripped out the recently installed smoke detectors on the executive floor at Chrysler headquarters in Detroit so they could smoke cigars with their red wine in the evenings. (Nice work, if you can get it.)
- Failure to retain top talent. Just three years after Fortune magazine named Chrysler as its “Company of the Year,” the entire dream team of executives most directly responsible for its pre-deal success had either left voluntarily or were forced out.
The Rest of the Story
By 2001, Chrysler was losing $3 billion annually and key competitors had crushed its U.S. market share by nearly 40 percent. Brand and channel conflict erupted, resulting in few, if any, cross-selling results while product rationalization and supply chain optimization decisions were routinely based more on “our way” vs. “best way.” Now here’s what will really blow you away: during the years leading up to the deal in 1998, Chrysler had quietly built the best product development process in the global auto industry. They had reduced their “concept-to-showroom” cycle time from five years to two years resulting in the lowest development costs in the industry, comparatively running at just 2.8 percent of revenues vs. 6 percent at Ford and 8 percent at GM.
My friend Jack Prouty, President of the M&A Leadership Council, would call that Chrysler’s “secret sauce.” In other words, their unique competitive advantage was built up over many years and based on a complex ecosystem of internal processes and capabilities that made it very difficult for competitors to replicate. Instead of preserving and leveraging Chrysler’s unique competitive advantage, Daimler’s consolidation mindset and its insistence that the Daimler way should prevail, combined with the other more obvious failure factors, destroyed the company. No wonder Daimler eventually paid Cerberus Capital Management to take Chrysler off its hands in 2007!