The Daimler Chrysler Failed Merger

In this case, we are going to present the general importance of the human resources during an MA process and we will see a concrete example with the Daimler Chrysler failed merger.

Mergers and acquisitions represent ways for companies to grow, develop strategic positioning, acquire technologies and talents and develop synergies. However, more than 80% of the mergers and acquisitions done failed to produce any benefits while half of them led to a reduction of the value of the companies. This figure is really surprising when we consider the number of mergers and acquisitions occurring in a year.

Nevertheless, a merger or an acquisition can also represent an opportunity. Indeed, one case out of eight represents a successful merger (or acquisition) where both companies come out stronger (such as the merger of Glaxo Wellcome and SmithKline in 2000). According to the specificities of both companies, of the industry, the success factor may vary from one situation to another. Human resources keep on being of a critical importance yet, whatever the situation. Indeed, when people from each organization show that they value each other and make efforts to actively develop good relationships and extract the best from each party.

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Whatever the reason why an organization is going to a merger or an acquisition, the good management of the Human resources during this process might add an important value and even as a key success factor according to some specialists. In this regard, we are going to analyze the importance of Human resources management while going through an M&A process. To do so, we are going to analyze the failed merger of Chrysler and Daimler.

The Role of Human resources

Once a company has decided to acquire or merge with another entity, the most important task to properly proceed is the association of the two workforces into one. This task is large and requires a good knowledge of both companies’ specificities, cultures and organization. This role is mainly assumed by Human resources. This critical process is supporting the M&A process and therefore should be carried-out with caution because of its importance.

The Human resources must lead the process; prepare both companies for the integration and plan reorganization. While conducting the process, human resources have to focus on building relationships between the two companies and create “bridges” between them. It involves that both Human resources departments of the different companies have to merge beforehand the two companies merge in order to “pave the way” for the merger process.

In this attention, some M&A tools have been developed. For example, nowadays, an “org chart” is a requirement for both companies, ie the acquired and the buyer since it permits to make the process of workforce planning faster and much easier. Some good software solutions have been developed to help the head of the company to better visualize the workforces and to combine more easily. Thanks to these tools, the management can better set budgets and arrange the structure to fit the new organizations goals and characteristics. These gears also permit to centralize information, data and personnel files which help in the allocation of the resources and defining the future company plan.

The Human resources are also in a particular situation to analyze the supposition about synergies and the nature of the assets involved. Contrary to the bankers that are rewarded for making money and to forget human issues, the Human resources manager has the possibility to influence events in order to help in achieving a successful M&A process. Beforehand, while the process and afterwards, the Human resources manager can be named as responsible for issues that can arise because of cultural differences. In fact, these issues are likely to make integration derail as well as decreasing the potential of innovation of the new company, maintaining communication streams towards all the directions (transversal to departments and organizations) and for decreasing the impact of the M&A process on those who are “the survivors”.

Human resources must act at all the level of the company, even the highest ones. Indeed, the head of the new organization needs to be able to work together on a daily basis, notwithstanding the barriers that can exist such as cultural or personality differences. The human resources role is to act as some oil in mechanisms; to make things easier and smoother. For example, assessing personal and team skills is helpful while establishing new efficient teams.

Opportunities for Human resources

The mergers and acquisitions are always carried out according to the potential synergies that can be developed regarding the cost savings, the complementarities of knowledge or the ownership of similar/closely associated patents but it very rarely regards the people involved and the potential cultural issues that may arise. Yet, it is this people that decide about the M&A process development and make it successful or not.

In this regard, an opportunity for Human resources relies in the fact that employees’ reaction and customers’ acceptance determine whether the newly created entity will be successful or a failure. Indeed, during the M&A process, Human resources may gain more power by convincing the new management team and therefore increase the overall effectiveness of the organization. Moreover, gaining such a position would permit to human resources to smooth the cultural changes instead of highlighting them.

Risks for human resources

Several mergers result in the solidification of staff departments. Sometimes, it also results in the closing of one of the Human resources department. Then, redundancy is highly likely to concern the department that is being erased. On the other hand, the other Human resources department is also highly likely to be in charge of a higher workload since it must now assume the workload of the other Human resources department.

In some particular cases, both Human resources departments remain in the company. However, some issues may arise because of this duality. Indeed, autonomy, interdependence, allocation of tasks, important decisions are often subject to arguments. Indeed, in this case it is a bit difficult to determine whether things should stay separated or should be shared.

The company that acquire is very often led to borrow money to finance the buyout and has contracted an important amount of debt. Therefore the logical step afterwards is to reduce costs in the organization ‒ and the human resources department is very often the first one to suffer from it. Nowadays, some important function normally ensured by human resources can be replaced for short term profits (and also very often long-term losses). These replacements do not appear like issue for leaders since it does not directly affect the level of the stock market. In this regard, the internal OD consultants might be the very first ones to be laid-off since they are not directly linked to the good roll-out of the products (or service) sales.

The role of Human Resources during M&A process can be divided into three different phases: the pre-process, the process in itself and the post process.

Pre-deal

During the pre-deal period, the role of the Human resources is very important and even critical for the good roll out of the M&A process. Indeed, the HR departments have to ensure both companies have already a clearly defined strategy before the process to start. In fact, when the process is started, everybody is likely to be too much busy to “think strategic”.

Formerly to the merger, the head of the organizations (or at least of the one that is acquiring) should have planned a clear strategy that includes: communication towards customers and employees, the layoffs conditions and the way cultures are going to be integrated. Regarding this last point, a culture survey has to be undertaken in both companies in order to point out the differences existing and then think about a way to combine and integrate them. These differences may be obvious in some aspects but more difficult to highlight in others. Going through such a survey would prevent from creation of delays in the implementation of the merger (because of unexpected issues about culture).

In truth, the Human resources department needs to consider the issue of culture within the new workplace. The way people work, what is valued within the organization, how people think and how they consider and value the other organization are factors to be taken into account. Very often, a feeling of contempt is felt towards the other organization ‒ whether in the case of the acquired or in the case of the acquiring. This kind of issue must be addressed directly because they will probably create issue in a near future.

As explained before, some cultural differences are really obvious but some others are more subtle and that justify the requirement for a cultural survey. A SWOT analysis has to be carried out about the new created entity as well. This analysis aims to determine the capacity of both companies to match and integrate one in each other.

In the end, before the process to be engaged, the head of the new entity has to consider the non-financial issues likely to arise. Are people going to be able to work together? Is the M&A process going to destroy the properties or talents that have made a company worth having? Would a partnership or a strategic alliance bring more benefits than integration? These issues are often neglected by leading teams as well as by the bankers who want the deal to be done.

During the deal

Because of its role, human resources is one of the few units able to work as an internal consulting group during an M&A process (some other groups such as quality or engineering may undertake such a position). Human resources managers have to use their skills in both management and coaching as to help the other executives and managers to achieve efficient communication, to address the various power issues likely to arise and even to deal with the cultural issues. According to the situation, the Human resources role is limited or extended. More than any employee in the company, Human resources managers have to assess their skills and knowledge in order to work as efficiently as possible.

During an M&A process, some typical issues are likely to arise.

Communication:

Since an M&A process is overwhelming for employees of both entities, communication has more importance than never. Indeed, during a merger or an acquisition process, the productivity is highly likely to be decreased. That is why a consistent and sincere communication is required both from the leading team and from the Human resources department.

Power and conflict:

During the M&A process, many conflicts are likely to arise. The more important thing is to conflict to the surface the sooner as possible as to prevent from any hidden propagation similar to gangrene. It is also much recommended to deal the more honestly possible with power issues. For example, if one person is clearly in charge of something, it has to be stated clearly and admitted the earlier as possible in order to prevent from “small wars” that are destructive for both sides and as to try to reach a win-win situation.

Culture:

When considering the role of culture in a merger or acquisition process, we have to consider both organizational and national cultures. An organizational culture is “an organization’s shared values, beliefs, and preferred ways to behave”. Very often the organizational culture somehow stems from the national culture. Cultural clash is the most common manifestation of the cultural differences. This element is becoming really critical since companies tend to be more and more international. However few people seem to have the skills to deal with culture from different organization and to ensure a good fit with the culture of their own organization.

Operations:

In any merger or acquisition case, the processes of both entities have to be analyzed in order to determine where the synergies can be achieved. Balance of power is often determining how the operational changes are going to be carried out rather than by analyzing the efficiency and quality of the processes.

Post-deal

After a successful merger (or acquisition), the human resources department has to stay attentive to ensure the complete and perfect achievement of the process. Indeed, many operations have to be carried out by the Human resources after the process. Some of them are very often neglected and that could lead to a dislocation in the merger. For example if the data of the workforce are not merged into a single file, what would think an employee from the acquired company when discovering it? Then the human resources department should ensure that the corporate culture is properly assimilated by the new employees. The process of the new organization should also be analyzed in order to optimize the process, better attribute resources and reduce expenses. The communication of the management’s performance has to be properly achieved in order to motivate employees and to create cohesion. Finally, the workforce has to be presented as global in order to reinforce the affiliation to a group.

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The Daimler-Chrysler case:

The merger between Chrysler and Daimler Benz was one of the largest in history. Both companies had started to screen the automobile industry for partners in 1997. In early 1998, Jürgen E. Schrempp, CEO of the German-based Daimler-Benz company took the initiative and suggested a merger to Robert J.Eaton, CEO of the American-based Chrysler corporation. The merger contract was signed in May 1998.

Thanks to our previous analysis of the role of the human resources in an M&A process, we are able to properly analyze and decipher the information and actions from the failed merger. Therefore, we are first going to briefly analyze the human resources in the Daimler-Chrysler company. Then, we are going to see the strategy and the human resources planning as well as the integration planning. Following to this, a description of the organizational alignment and agility of the newly created company will be undertaken. Finally, we are going to analyze the succession planning implemented in the Daimler-Chrysler entity.

Overview of the human resources in the company:

In this section, we are going to describe the human resources in the newly created organization. The human resources have been split into four different modules in the company: the human resources database, successor planning, projects and tasks assignments and the planning of training.

Source: Institut AIFB, Universität Karlsruhe [i] 

We can observe that all the modules are interdependent.

Strategy &HR planning in the company

The Daimler Chrysler is a new entity stemming from a merger that took place in 1998 between the German-based Daimler-Benz AG and the American-based Chrysler Corporation.

This merger of equal appealed to organizational changes and modification in the strategy of the newly created company. The two companies were trying to move from their position of “coordination growth stage” towards a “collaboration growth stage” according to Cartwright and Cooper [ii] . This change was led through the establishment of a new and single operating entity. In this regard, the change management objectives was to find the best way to integrate both companies’ culture, organizational structure, philosophy and processes in the new firm as well as integrating employees from both companies.

One of the reasons for the failure of the merger is linked to the consideration of the human resources during the merger. Indeed, the focus was not put on the soft skills of people but rather on the legal and financial aspects of the operation. Therefore these aspects were neglected during the negotiation phase; the corporate HR directors from both companies were not even informed or involved at this stage. Another important aspect that had been neglected is culture. German and American cultures are very different from each other.

Consequently, a resistance to the change arose and slowed the process down. According to a study led by IBM Global Business Services in 2008, only 41% of the projects supposed to bring the change were properly carried-out, 44% of them achieve halfway their goal while 15% of these projects are not achieved or are abandoned.

The human resources planning involved changes in various fields. The team collaboration and the business units were deeply modified and led to relocations and uncertainty for the change management. The fast establishment of the new business units, the modification of the management roles and strategies influence the paradigm of organizational structures [iii] . These deep and intentional modifications result in an important frame breaking change.

Therefore the change is deliberate in this situation since it intends to integrate both companies in a new entity in order to stay competitive. However, we can observe that the change is asymmetric since both companies try to modify their strategy and culture their way.

Organizational Alignment & Agility in the company

Organizational alignment is the synchronization of the different function of a company in order to achieve the most efficient operations and reduce the frictions that decrease the productivity.

Major purpose for Daimler-Chrysler was to sustainably increase the added value, especially to realize new global savings opportunities. This initiative required major structural changes and the alignment of the entire organization.

The alignment was really necessary since the different departments were integrated into a new entity. We can observe this synchronization happened to be organizational oriented rather than individually oriented. Thus, it created a misbalanced situation and the individual aspect has been neglected in favor of the organizational aspect.

The integration of the divisions should have been guaranteed by having the CEOs of the divisions present on the board of Daimler Benz (Daimler Benz changed its name to DaimlerChrysler in 1999 after the merger with Chrysler), which according to German law had collective accountability. In reality, the vision turned out to be less successful than touted. Synergies between divisions were hardly used (e.g. Mercedes Benz, the car business, bought equipment from Siemens rather than Daimler’s AEG). This is hardly surprising, considering the strong resistance felt in the rank and ¬le. Employees who had been proud producers of high-quality cars suddenly faced everyday criticism, being part of a conglomerate with considerable interest in the arms industry. This was by no means in compliance with their values! Had they been engaged in the transformation process more intensively this issue would have become clear much earlier. The expensive spending spree could have been topped before it actually took place. On top of this cultural problem, the divisions themselves had dif¬culty restructuring as minority shareholders continued to interfere and the different cultures turned out to be less than easy to combine. Internal programmes, similar to Shell’s LEAP programme, were begun in order to gain some of the lost ground. The programme run by the car division in fact turned out to be highly successful. Nevertheless, these attempts at turning the company around were not enough.

Instead of using ¬nancial reserves to keep the engine running, he announced a DM5.7bn loss, the largest in German history. This bold move prepared the organisation and the wider public (particularly the unions) for painful changes. The crucial point, however, is that Schrempp did this in order to realign the organisation with the vision of Gottlieb Daimler to produce top-quality vehicles. By 1997, 12 of the company’s 35 units, including AEG, Fokker and Dornier, were sold or spun off and the divisions reintegrated into a single company. This resulted in the company making a pro¬t of DM3.7bn in 1996. Nevertheless Schrempp e like Reuter e was convinced that Daimler was not going to survive as an independent company if it only pursued a niche market.

A post-merger integration team was installed. The strength of the process (tackling 98 themes and 1,232 projects) was the fact that line managers (supported by a centralised strategy team) were running these projects straight away. This ensured the true engagement of the organisation rather than arti¬cial communication processes. Operational leaders were able to take charge of their own destiny at an early stage. Despite these efforts and various other integration programmes, obvious frictions were not avoidable. The enthusiasm around the deal gave way to a more cautious approach, not only at the board level, where the company saw most Chrysler executives leaving. The falling share price and the difficulties faced by Chrysler are still causing problems. Chrysler’s ¬nances seem to be improving since Dieter Zetschke, a Daimler executive, took over in Detroit, thanks to increased consumer demand and cost cuts.

Workforce engagement, capability & capacity in the company

Succession planning in the company