Globalisation has changed the appearance of the economy. Especially in the 1990’s firms expanded into new markets to operate more global and to develop their business. To do so, many companies choosed to expand via corporations with other companies to make the market entry easier or simply to strenghten their market position.
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Mergers and acquisition became one of the most used tools for development, whereas a merger between well known and successful companies always caused a sensation. Mergers caused such a stir as the companies involved in a merger faced a complete new identitiy and innovations were about to alter the company.
The research project proves the decision for a merger rather than an alliance and the synergies gathered due to this tool of development. Two companies, Daimler-Benz and Chrysler, are investigated to illustrate the academic frameworks in practice to come to a conclusion why they merged. Methodology includes analysis of secondary data which has been published on the subject area.
The findings and analysis of the research conducted, concluded that synergy is the most important aspect when companies grow through mergers. Furthermore, the results show that internationalisation due to globalisation is the key driver of mergers.
The paper concludes with an evaluation of the study and recommendations for further research.
1.1. Reason for Choice of Topic
Companies come and go, chief executives rise and fall, industry sectors wax and wane, but an outstanding feature of the past decade has been the rise of mergers and acquisitions (M&A). Whether in times of boom or bust, M&As continue to be the preferred option for businesses seeking to grow rapidly.
A company has several options to choose from when it comes to growth strategies. One option is to grow organically by increasing sales personnel, new product developments and by expanding into new geographical areas. Alternative options to achieve the desired growth, companies traditionally build, buy, merge with other companies or co-operate through alliances. However, the best example of how to grow inorganic is to merge or aquire (Sherman, 2005).
M&As are mainly about growth according to Lees (2003) and Sudarsanam (2003). Internal or organic growth is in most cases a slow process and M&As is another option that will increase the growth process. By doing an M&A deal, the acquiring company or the merged companies can get instant access to new markets, technology and operations can be completed more efficiently. Several reasons and motives exist why a company chooses to grow through M&A. According to Gaughan (2002) the most common motive for M&A is to create synergy. However, other motives play also an important role, like diversification, improved management, market power or tax motives. Johnson and Scholes (1997) state that M&As are a quick way of entering new markets or products. The company can also gain competences or resources through this way. Knowledge about the market situation is also a significant cause why companies choose to develop through M&A. Another reason for companies to develop through M&A is that they are actively searching for benefits arising from synergies.
The author has chosen the topic to gain further knowledge about the topic of why do companies actually merge to gain synergy. The reasons for attempting to gain further knowledge are based on the author’s fascination on M&A in general and to the extend why Daimler-Benz and Chrysler did actually merge. The split between those two has not been long ago and therefore the author was particularly interested in this merger. Furthermore, the author is interested what type of synergies were the most relevant in this ‘merger of equals’.
1.2. Academic Obejctives of Dissertation
This research aims to point out that synergies play an important role when two companies are doing a corporation in order to grow.
The author has chosen the following objectives in order to support the research hypothesis:
To discover why companies select mergers instead of strategic alliances as tool for development
To investigate to what extend synergies play an important role when merging
To explore the importance of internationalisation in times of globalisation
1.3. Outline of Chapters
Introduction: Introduces the topic of this research and explains the aims and objectives of the study.
Setting the scene: This chapter is to set the scene for the study. It presents background information about the two companies and what actually did happen.
Literature review: Discusses the academic literature on mergers and acquisition and synergies concentrating on several approaches to be applied to the case study.
Methodology: Discusses how the research was conducted and recognizes any limitations and biases of the chosen methods. It involves a description of how the research and data was analysed.
Findings: Presentaion of the case study including important information for the research
Analysis: The findings from the secondary research are analysed against the earlier literature and research from chapter three.
Conclusion: The research project is finally concluded, commenting on the initial objectives of the study. The limitations and recommendations for further research are also discussed in this chapter.
2.1. Background of Daimler-Benz AG
As Jurgen Schrempp became the new CEO of Daimler-Benz AG in May 1995, one of his first jobs was the promulgation of a new strategic concept containig five points to strenghten their market position and to expand further. Mercedes considered the US market to be the important and competitive automobile market in the world. They established a greenfield plant in Tuscaloosa in 1994 already to strenghten their position in the US market and were supposed to be market openers. Those were the first signs that Daimler-Benz wanted to expand.
2.2. Background of the Chrysler Corporation
From 1994 to 1997 Chrysler beat one historical record after another, where even some models were selected as ‘cars of the year’. It was even crowned by Forbes as the ‘company of the year 1996’. Bad labour relations have been improved through corporatist agreements. However, most cars were sold in the home market and plans to expand to other non-american countries have been scattered more or less. Nevertheless, the frequent crises and the internationalisation deficits of the company had planted the idea of a partner in the minds of the Chrysler executives.
2.3. The Merger
When in May 1998 the CEO of Daimler Benz, Jurgen Schrempp and Robert Eaton, CEO of Chrysler signed the contract for a merger between those two companies, they made the biggest industrial merger in history. Both partners expected great value and advantages, as both companies seemed to complement well with each other. As a matter of fact, the company did not develop as good as anticipated.
From the beginning on DaimlerChrysler could only announce little profits and losses, in the year 2001 it was even the biggest loss in history of all German companies. By mid 2004 the market value of the company has been less than half of what the value has been of both companies before the merger. By the same time the sales figures and business numbers of competitors increased. In May 2007, not even ten years after the merger, the dream of a super company bursted like a bubble.
3.1. Reasons for Internationalisation
As Kwon & Kopona (1993) state in their theory the choice of market entry should relate to the company’s corporate strategy and the extent, depth and geographical coverage of the present and intended foreign activities. Furthermore, the decision for growing should be made when there is a sufficient understanding of the different types of entry. On the one hand companies could gather experience through alliances and on the other hand fail to see that in particular cases an acquisition would be more successful (Clark, 2005). Dyer et al. (2004) state that a specific advice is needed about when to apply each strategy that is based on internal and external circumstances. Especially internally, the companies should focus on resources that are to be combined, the extent of unnecessary resources and the type of synergy which the firms seek. Externally, important factors are the degree of market uncertainty and the level of competition. As experience and interests of the company are different, these factors will have different degrees of importance.
In Porters (1987) point of view entering a new market must be attractive for the expanding company. It needs feasibility of making profits in the target organisation. The costs of entry must be taken into account. These include direct costs as the cost of shares and advisors and indirect costs include such costs as integration costs. According to Dunning (1988) where he argues with the eclectic theory that additional costs can occur because of the failure of knowledge about market conditions, the legal and cultural diversities and the increased costs of operating at a distance. It also must be taken into consideration if the possibility of gaining synergies exists and what the opportunity of benefiting from the target company’s core competences is. The local advantages of countries play an important role. The main country advantages can be classified as economic advantages, consisting of quantity and quality factors such as transportation, production, scope and the size of the market. Then there are political advantages that include government policies which have a positive influence on the market entry. And finally there are social and cultural advantages, which implicate the physical distance between the home country and the foreign country, language and cultural diversities and the general attitude towards foreigners. Dunning (1988) declared that companies have to be aware that relative attractiveness of locations can change over the year. He also declares that particular know-how and specific core abilities which count as an internalisation advantage can have a positive impact on the general business performance.
3.2. Methods of Development
3.2.1. Merger and Acquisitions
As De Witt & Meyer (1998) state in their thesis, mergers and acquisition are the most popular and influential form of discretionary foreign direct investment. Acquiring of another company is a takeover, be it friendly or hostile, while mergers only represent the share in a company according to Douglas & Craig (1995). A non-adversarial approach benefits not only buyers but vendors as well, claimed by Beckett (2005). Mergers and acquisitions are significant alternatives to internal growth of companies as they enable company’s fast penetration of new and foreign markets, acquire necessary know-how and skilled personal and obtain economies of scale and scope, according to Jackson (1995). Companies that merge gain access to supply and distribution channels through an upstream alliance. Furthermore Contractor & Lorange (1998) state that enhancing their reputation and reducing competition if the integrated company is a competitor might be seen as an advantage. M&As are a well developed strategy and not a reaction to the first apparent opportunity as Simmons (1988) argued. As Coyle (2000) states, M&A can be the outcome of either an aggressive or defensive strategy. Aggressive would mean that the company will seek to improve its market position to create a bigger company and finally to produce on a bigger scale and more cheaply through economies of scale. Defensive strategies on the other hand are made in order to survive in changing industry. A totally different reason for doing M&A claimed Beckett (2005) as he said that companies may benefit from M&As when they acquire a company at a certain value and sell it later at a higher value. Through increasing shareholder value by providing a higher level of dividend and capital gain return and securing a higher return on the investment.
This paper is mainly looking for the purposes for a merger and therefore for the realisation of potential synergy effects, as the purpose of most M&As is to achieve some kind of synergy. The belief is that two comparable companies together will achieve far better results than independently. Cost cuttings and savings will often lead to this effect. A successful M&A can be classified as one where the potential synergies identified are to be utilised best as Coyle (2000) states.
3.2.2. Strategic Alliances
Johnson (1999) has declared that defining strategic alliances are difficult to define as various forms exist. Clark (2005) defines it as two companies which are brought together with similar interest but with different strengths to work on particular projects, developmental approaches and marketing agreements which will offer benefits for both companies. Lorange and Ross (1992) even came to the conclusion as strategic alliances entail a very broad definition that it incorporates M&A. Strategic alliances can be separated into three different types as Contractor and Lorange (1988) state: Joint ventures, Non-equity alliances and Minority equity alliances.
Preece (1995) recognised 6 main reasons for strategic alliances, starting all with the letter “L”, therefore they can be named as the “6 Ls”.
Learning is the first one of them, as he argues that knowledge will be acquired. Leaning is meant as replacing the value chain activities and filling in the missing infrastructure. Leveraging will fully integrate the firm’s operation. Linking suggests that the links between supplier and customer should be build closer. Leaping pursues a radically new area of endeavour. And finally Locking out, which means reducing competitive pressure from non-partners.
3.2.3. M&A versus Alliances
The main difference between M&A and alliances is the power of control according to Lorange & Roos (1992). A pure acquisition would mean that the brought up company is under the control of the ones who bought it. To achieve growth due to acquisition and remain in control, huge financial resources are needed.
Rather than buying a whole company, a corporation can propose a joint venture with a specific division in which the corporation is interested in. In case this joint venture works well, a multi-activity alliance could be grown. Equity swaps can be conducted for long-term stabilisation. However, without full control the corporation cannot decide for its own how the alliance or the merger will develop or if it will continue. A company with two equal CEOs does not work out well due to different interest and objects as Lorange & Roos (1992) state. And Clark (2005) stated earlier that companies could gather experience through alliances but fail to see later that in particular cases an acquisition would be more successful.
3.3.1. Types of mergers
In a merger, the assets of two previously separate firms are combined to establish a new legal entity. In fact, the number of mergers in “mergers and acquisition” is almost vanishingly small. Less than 3 percent of cross border mergers and acquisitions by number are mergers. In reality, even when the mergers are supposedly between equal partners, most are acquisitions where one company controls the other. When there is a merger between two competing firms in the same industry, it is called a horizontal merger. (Buckley and Ghauri, 2002). When there is a vertical merger, two companies merge that have a buyer-seller relationship. Then there are the three conglomerate types. Pure conglomerate will be a merger where there are different markets and different products, so totally unrelated. Then there is conglomerate market extension, where it is a merger between a company that offers the same products but in a different geographical market. The last type is the conglomerate product extension, where the merged company sells non-competing products, but functionally related in production and distribution.
In the case of the dissertation, it focuses on horizontal mergers which operate on overlapping markets and segments.
Cartwright & Cooper (1996) claimed that the definitions and intentions of M&As often read like a cheesy novel with a likeness to a more or less welcomed dating or courtship. The following four approaches are made:
Pillage and Plunder
Love and Marriage
Love and Marriage would certainly best fit to the focus of this paper, as the aim is to achieve a positive long term international growth. The fourth category is aiming for long term integration through assimilation and blending.
3.3.2. Cross-Border Mergers
One important aspect of understanding cross-border M&A is to examine the logic driving the deals. Strategic motives for a cross-border merger involve acquisitions that improve the strength of a firm’s strategy. Examples would include mergers intended to create synergy, capitalize on firm’s core competence, increase market power, provide the firm with complimentary resources, products and strengths, or finally to take advantage of a ‘parenting advantage’. However, in a recent book by Mark Sirower (1997) he argues that synergy rarely justifies the premium paid. Sirower declares, “many acquisitions premiums require performance improvements that are virtually impossible to realize even for the best managers in the best of industry conditions” (p.14). In exploiting a core competence a firm takes an intangible skill, expertise, or knowledge and leverages it by expanding its use to additional industries where it may create a competitive advantage in several different businesses. One strategic reason to acquire is to gain complimentary products, resources or strengths.
Research shows that one important driver of cross-border mergers and acquisitions may be undervaluation (Gonzalez et al., 1998). A driver of cross-border mergers might be differences in the macro-economic conditions in two countries. That is, one country might have a higher growth rate and more opportunity than some other country. Thus, it would seem reasonable to expect the slower growth country to be more often home to acquirers whereas the faster growth country is likely to more often home to target firms as Hitt et al. (2001) stated.
Reasons for cross-border acquisitions include market power, overcoming market entry barriers, covering the cost of new product development, increasing the speed of entry into a market, and greater diversification. Cross-border acquisitions can produce both economies of scale and economies of scope. They help a firm enter new international markets and thereby enhance their ability to complete in global markets. Of course, cross-border acquisitions are even more challenging to complete successfully than acquisitions of domestic firms according to Hitt et al. (2001).
In fact, some research studies suggests that with the right strategy and the right approach to post-merger integration, cross-border acquisitions can create value for the acquiring firm according to Belcher and Nail (2000).
3.4. Motives and Objectives for Merging
The literature on motives for M&A has placed a significant amount of different sources and theories by several authors.
The merits of using mergers to reduce costs are disputed by managers and by practitioners. For example, managers have been heard to comment that costs reductions are the merger benefit that is most likely to be achieved whereas the achievement of synergy is highly uncertain. On the other hand, Michael Porter argues that what passes for strategy today is simply improving operational effectiveness. Porter (1998) argues, “In many companies, leadership has degenerated into orchestrating operational improvements and making deals” (p.70). It is understandable how operational effectiveness may have come to be the driving motive for many mergers, however. Often at the same time a merger is announced, there will be an announcement of a cost reduction target.
Merging in order to create synergy is probably the most often cited justification for an acquirer to pay a premium for a target company. Synergy effects can be created by redeploying assets. This can mean two different things. In the first case, the acquiring company may transfer a resource belonging to the target company to the acquiring company. Colombo et al. (2007) also found out that a strong predictor of acquisition performance was the extent of asset redeployment from the target to the bidder. Weston and Weaver (2001) stated that the first category is synergy or efficiency for a merger, in which total value from the combination is greater than the sum of the values of the component firms operating independently. Hubris is the result of the winner’s curse, causing bidders to overpay; it postulates that value is unchanged. Of course, in a synergistic merger, it would be possible for the bidder to overpay as well. The third class of mergers comprises those in which total value is decreased as a result of mistakes or managers who put their own preferences above the well-being of the firm, the agency problem.
Economic motives are an important subcategory creating strategic logic for a merger. One example is to establish economies of scale. A second closely related reason is to be able to reduce costs due to redundant resources of two firms in the same or closely related industry. Thus if the company acquires a company that is in the same or a closely related industry and there is substantial overlap between the two businesses there may be ample opportunities to reduce costs. Another reason is that the stock of the firms from a particular country may be undervalued. A fourth reason is the macroeconomic difference between countries such as different growth rates. Finally, the exchange rates may play a role. Recent research did show that acquiring a foreign company when the home country currency has appreciated in relation to the target company’s currency has great benefits for the acquiring company when the industry is highly technological (Georgopoulos, 2008).
Firms engage in merger and acquisition activity for many reasons. Effective mergers and acquisitions can, for example: serve as a platform for corporate growth, lead to increased market share, provide the foundations required to generate and gain advantages from economies of scale (these are benefits that occur when the firm is able to use its resources to drive costs lower across multiple products; scale economies are acquired primarily at the operational level) and economies of scope (these are benefits realised through using one unit’s resources in the operations of another unit), and reduce organizational expenses by eliminating duplication and transferring knowledge between and among business units and/or individual product lines (Collins and Montgomery, 1999).
One of the most important motives for M&A activities, as seen from the experience of the last decade, has been economies of scale and scope. Companies aim to achieve economies of scale by combining resources of two merging companies or create economies of scope by acquiring a company allowing product/market diversification. Other motives include access to each other’s technology or market reach, achieving a dominant position in the industry, consolidation of the industry, and manipulating rules of competition and antitrust as Buckley and Ghauri (2002) state.
The question as to ‘whether’ merge primarily concerns the identification of the corporate objects and which of these objects are to be pursued through organic growth and which through M&A in the form of participations or a full takeover. At the same time, the consequences of the growth strategy and its economic or financial effects in the light of the competition situation and the extension of the value added chain must be carefully examined.
Empirically, in approximately 85 per cent of all concentrations between undertakings and acquisitions, the question as to ‘whether’ is answered with a view to the object of achieving growth in the core business (Picot, 2002).
However, Buckley and Ghauri (2002) stated also that mergers and acquisition have become the most dramatic demonstration of vision and strategy in the corporate world. More than 50 percent of the mergers so far have led to a decrease in share value and another 25 percent have shown no significant increase.
When coming to a conclusion what is now the main purpose to merge, the author would conclude that it depends on the companys’ expansion strategy and the different motivation to form alliances. However, effective mergers and acquisitions can serve as a platform for corporate growth, lead to increased market share, provide the foundations required generating and gaining advantages from economies of scale and scope as Collins and Montgomery (1999) concluded. These factors are seen as the most important motives to form a merger and to believe that it would help the effected corporations to strengthen their market position and even gain more market share.
According to Coyle (2000) synergy is the additional benefit that can be derived from combining the resources of the bidding and target companies. Synergy has been described as the ‘two and two makes five effect’. It can also be classified as Gaughan (2002) put it, as synergy and value creation are a synonymous and synergy is when the value of the M&A exceeds the value of the two separate firms put together. According to Habeck et al. (2000) the term synergy is used as a synonym for cost cutting. However, in his book he argues that those companies that understand this definition of synergy as cost cutting need to redefine it as it also includes the positive aspects of the M&A such as growth and knowledge sharing. Furthermore, he states that it is important to capture growth synergies as quickly as possible and favour those areas where cost efficiencies can be gained. Therefore synergy is an important part in a successful merger. Ansoff (1986) classified different types of synergies. Management synergy occurs when the top management of one of the companies resolves problems of the other company through their experience. Investment synergy can occur from the joint use of plant and equipment, joint research and development efforts, and having common raw materials inventories. Operating synergy can arise from better utilization of facilities and personnel and bulk-order purchasing to reduce upcoming material costs. And finally sales synergy where a merged organization can benefit from common sales administration, distribution channels, warehousing and sales promotion.
3.4.2. Creating Synergy through Mergers
Hitt et al. (2001) states that there are four foundations in the creation of synergy which are called strategic fit, organisational fit, managerial actions and value creation. As all four foundations exist the chance of creating synergy is substantially better. Strategic fit can be defined as the match between the two companies’ organisational capabilities. As two companies with similar capabilities and the same strengths and weaknesses merge the chances of creating synergy is reduced. Organisational fit means that the two companies are highly compatible, meaning that these have similar management processes, cultures, systems and structures. This makes it easier for the firms to share resources, knowledge, skills and effectively communicate. Companies without organisational fit could find that the integration process will be hard to implement. Managerial actions is that creating synergy requires the active management of the acquisition process, in order to realize the different synergies and the benefits they convey. To create synergy an active management is needed that recognises the international issues and other problems connected with the M&A process. Value creation is the last of the four synergy creation foundations. It is based on the fact that the benefits from the synergy need to exceed the cost of creating and capturing synergy. The costs that should be less than the value of the synergy that is created include those associated with a purchasing premium, financing of the transaction and the set of implementation actions required to integrate the acquired unit into the existing organisational structure. Synergy will add no value as creating it outweighs the value of the synergy. Gaughan (2002) has compiled a model of the process of realizing synergistic gains. The management needs to carefully deal with the strategic planning since the better planned M&A is a better chance to succeed. Secondly the management needs to integrate the two companies into one. Finally the synergy can be separated into revenue enhancing synergies or cost cutting synergies. Ficery et al. (2007) furthermore points out that synergy created through M&A, the targeted company has access to new geographic market or access to a new customer segment allowing the acquiring company to reach those new markets and segments at a faster pace and at a lower cost.
In this chapter, the author examines the most suitable methodology for the research area and justifies the different methods chosen. It outlines the authors’ main decisions on methods and data collection and considers their implications for the research findings. It also includes details for the sources used for information collection and explanations why other research methods were rejected.
Furthermore, this chapter will give an insight into how secondary research has been gathered, discuss advantages and limitations of research methods and illustrate ethical issues.
4.2. Research strategy
This chapter examines the most suitable methodology for the research area and justifies the methods chosen. The author explains how the linkage between the academic literature and reality was explored by using research methods. Furthermore, it will give an insight into how secondary research has been gathered, discuss advantages and limitations of research methods and illustrate ethical issues for this thesis.
According to Jankowicz (2000) there are four research strategies that can be used for conducting: the archival method, the case study, the survey and the field experiment. By using the archival method, the companys’ present and future performance can be analysed by using past financial figures. Using the case study as a research method, a specific organisation can be analysed by researching the internal and external situation of the organisation to find conclusion for a specific subject. Through surveys, human input can be used to find representing input out of the population to a specific topic. A field experiment applies the scientific method to experimentally examine an intervention in the real world.
The case study is the most suitable research method to use, as the objective of this research is to analyse and investigate the external situation within a real-life context. Case studies can be described as empirical surveys. They investigate a contemporary phenomenon in a real-life context by using different resources when boundaries between the phenomenon and the context show no clear evident as Yin (1994) stated.
The Daimler-Chrysler Merger as a case-study is therefore the best suitable research method as the boundaries of this cases study are determined by research aims and objectives. The author visualises the main causes for the decision of both companies to agree on a merger and why they decided to do so. In addition, certain mistakes can be pointed out, analysed and interpreted in order to come to a proper conclusion.
4.2.1. Case Study Design
According to Robson (1993, cited by Saunders et al. 2007, p.94) case studies are the development of detailed and intensive knowledge about a single case or a small number of some related cases.
As stated by White (2000) the use of case studies has the following advantages:
Empirical data and information is gathered
Can be used in small-scale research
Can be conducted by a single researcher
As Yin (1994) states, there are overall six different types of case studies. An explanatory case study would best fit and will be used throughout the dissertation, as the existing theory will be used to understand and explain what happened. The case study has to meet all the requirements to challenge, confirm or even extend the theory.
Due to the fact that the Daimler-Chrysler Merger is such a big topic, the author decided to take only a single case study. Multiple case studies do not fit to the topic chosen. Furthermore, the author can concentrate more intensive on the one case study instead of comparing different other cases with the one of Daimler-Chrysler.
4.2.2. Quantitative versus Qualitative Data
Two different types of data can be taken into account. Quantitative data is predominantly used as a synonym for any data collection technique such as questionnaires or data analysis that generates or uses numerical data. In contrast, qualitative data is used predominantly as a synonym for any data collection technique such as interviews or data analysis that generates or use non-numerical data (Saunders et al: 2007). Using numerical data, quantitative data can also be described as being scientific according to White (2000). In contrast, qualitative data is more like descriptive and non-numerical.
Layder et al. (2003) explained that the main differences are as follow: quantitative research uses measurements, whereas qualitative does not. Ghauri & Gronhaug (2005) argued differently that the distinction between quantitative and qualitative is not only a question of quantification, but also a different perspective on knowledge and research objectives.
Qualitative research can be rational, explorative and intuitive and the skills of the researcher play an important role in the analysis of data according to van Maanen, 1983; Strauss & Corbin (1990). Qualitative research is useful for researchers who want to understand human behaviour and in social and behavioural sciences. Due to this fact the data is often collected through interviews and observations. Using quantitative research, individual data is collected, gathered and analysed. When quantitative research is used, the author has to pay attention to the use of predetermined instruments and therefore analyse the results quantitatively. Both research methods can be used at different levels or stages of research. According to Ghauri and Gronhaug (2005) quantitative and qualitative methods can be combined in the same study and are, therefore, not mutually exclusive.
Due to these factors quantitative research was considered as inappropriate for this study. Qualitative data is far more suitable for this thesis.
4.2.3. Secondary Research
Secondary research can be defined as information which have been used already and therefore have been collected for an earlier research project with another purpose, but that can also be used for present studies as Sekaran (2003) declared.
Due to the decision to take qualitative research, the author decided to use secondary research only. Primary research was rejected on the grounds that the author came to the conclusion that it is very difficult to get interviews with appropriate people who were in charge by that time. On the other hand by asking for interviews at Daimler-Benz AG as well as Chrysler LLC, they rejected any interview queries to this specific topic as they are to bind secrecy. The author also believed that any response from both companies would be prejudiced to this severe topic. By answering important question not correctly to defend the company’s action would have led to misguided answers. Even though it would have been easier to understand the real reasons why Daimler merged with Chrysler and to what extent they would have calculated with a successful M&A deal. As only secondary research is available concerning the merger between Daimler and Chrysler, the information regarding this topic have been sourced from the company’s’ websites, annual reports and internal bank reports to gather optimal answers and explanations to this complex theme.
Furthermore, the author has more time to spend on theoretical issues, as secondary research is already available to concentrate on important issues coming up from the project. Due to this fact, the author believed to meet the projects objectives in an appropriate way by analysing and interpreting the data given. Saunders (2007) also declared that the secondary research
The fact that the merger between Daimler and Chrysler was in 1998 brought some severe limitations to the author in terms of research. Even though the merger is a very broad topic, not all aspects could have been included into the dissertation. The limited word count leads also to the fact that not all theoretical aspects can be taken into account, nor is it possible to analyse all the reasons why the merger happened. All the limitations were recognized by the author while doing the research but encounters strengths and weaknesses.
While doing the secondary research the main difficulties arise from the access to the information needed the availability of up-to-date data and bias of the literature. Another problem while collecting the secondary data can occur as the data collected does not directly correspond to the specific needs of the study. As no primary data is used due to rejected interviews with persons in charge, the author must rely on information given by the organisation. This must be handled very carefully as managers want the public to view the organisation in a positive way (Saunders et al., 2007).
When the author did the research about the project, he came to the conclusion that it was in some cases rather difficult to find appropriate information. As Ghauri & Gronhaug (2005) state is the secondary data often biased and sometimes even contradictory.
The author tried to overcome some of the limitations by trying to view things from a neutral point of view to remain objective and to be as sensitive to the information found as possible. He will also be selective with the information found and treat it with caution.
4.4. Ethical Issues
Ethics have to be taken into consideration, as they are moral principles and values that influence research activities as Churchill (1999) states. As Ross & Harris (1994) explain, do researchers have the responsibility to find answers honestly, explain them carefully and inform readers about possible weaknesses and the reliability of the results. Ethical issues play not a determine role at all, as only secondary research will be used. The author was aware that the research carried out was respected to the grounds of ethic policies and ethical issues were regarded. The regulations and the ethical policy of Northumbria University concerning the research were made corresponding.
5.1. Daimler-Benz AG
Daimler-Benz was the world’s most profitable car maker in 1998, owning a brand with high international reputation, Mercedes, known for its high quality state-of-the-art engineering. Daimler-Benz sold about 920,000 cars in the year of the merger. The prices for cars made by Daimler ranged from $31,000 for the C230 model to $135,000 for the company’s top model, the S600. Daimler-Benz had some of the highest production costs in the industry, partly caused by the high labour costs in Germany, where the average salary was $28 per hour by that time. Daimler-Benz had a work force of 320,000 employees, many of them working in Daimler’s non-auto operations, like the aviation business and financial services.
Daimler-Benz was described by automobile analysts as conservative, efficient and safe.
5.2. Chrysler Corporation
When the merger was announced by Schrempp and Eaton, Chrysler was the most efficient car producer with a very strong position in the SUV and minivan market of the so called America’s Top Three. Chrysler’s high profitability was mainly achieved by relatively low research and development expenses and a comparatively aged product portfolio with many popular, well-established models generating high profits.
Only a few years before the merger was announcement, in the mid-1990s, the Chrysler Corporation struggled and was very close to bankruptcy and survived a failed hostile buy-out attempt launched by Kirk Kerkorian, a corporate raider who had a big stake in Chrysler at this time. Chrysler’s top advisers saw a need for the company to merge with another automobile maker in order to survive in the high competitive car industry.
In 1998 Chrysler sold a record of three million cars and trucks. The bottom of the price range was represented by the Neon model selling for $12,000. Chrysler had become the world leader in ‘low-cost, high-volume auto production’, after all the financial difficulties it had faced in its history. More than 90% of Chrysler’s 120,000 employees worked in the USA and earned on average $22 per hour (Gibney Jr. 1999).
Chrysler was characterized by automobile analysts as daring, diverse and creative.
5.3. Insides of the Merger
Jurgen Schrempp, Chairman of Daimler-Benz Management Board and Robert J. Eaton, Chairman and CEO of Chrysler Corporation, both being the protagonists of this huge merger spoke of a ‘marriage made in heaven’, while others compared it with the match of Prince Charles and Lady Diana – a German aristocratic noble brand asking for the hand of a beauty bride from the New World (Schneider, 2001). The interest in the merger can be located in the acceleration of the ambitious ‘globalization strategy’ in the case of Daimler-Benz, and the assurance and consolidation of the risky ‘innovation and flexibility strategy’ in the case of Chrysler (Freyssenet et al. 1998). The latter is particularly risky, because innovation does not necessarily guarantee success but requires continuous investments. New market strata permit profit gains with little competition, but they are easy to miss and quite short lived. The geographical implantation, the product range and the brand images offer a nearly ideal complementary picture with minimum of overlapping. But this means at the same time that the brands cannot be merged. Further globalisation and cost-cutting via synergies, know-how transfer and mutual learning were the middle-term goals of this merger. Both companies are still facing the task of entering their respective markets and the emerging Asian markets, where joint ventures and alliances have so far not achieved their objectives. Chrysler for instance failed several times in Europe, and Daimler-Benz started its first timid recovery of the lost North American market after the opening of the Tuscaloosa M Class plant in 1994.
The synergies achieved through the merger will not be so much in production but in opening markets, in purchasing, and in research and development competencies. This interesting attempt consists of combining the Chrysler strategy of permanent innovation and the Daimler-Benz strategy of high-tech quality to gain technology and innovation leadership in a variety of markets. The global sourcing permits a stronger bargaining position in supplier relations, obtaining lower prices, particularly for high-volume standard components. The most interesting and most worrying for competitors, is the synergy potential for areas of research, development and design. Here, both companies were leaders in some segments and can therefore mutually reinforce their positions (Freyssenet et al. 2003).
Daimler-Benz AG, a stock corporation, was the largest industrial group in Germany with 1997 revenues of DM124 billion ($68.9 billion). Although known primarily for its luxury Mercedes cars, Daimler operated in four business segments: Automotive (Passenger and Commercial Vehicles), Aerospace, Services, and Directly Managed Businesses. Chrysler Corporation, incorporated in Delaware, operated in two principal segments: Automotive Operations and Financial Services. Primary operations included research, design, manufacturing, assembly, and product sales (including trucks and accessories), as well as financial services providing consumer financing for Chrysler products (Bruner et al., 1999).
Several potential reasons existed for the merger. Daimler derives 63 percent of sales from Europe, while Chrysler depends almost exclusively on North America, with a 93 percent share of all sales. As Robert Eaton mentioned, “Both companies have product ranges with world class brands that complement each other perfectly. We will continue to maintain the current brands and their distinct identities” (Waller, 2001). Moreover, both companies are trying to expand geographically in their respective markets, and immediate growth opportunities will exist by using each other's facilities, capacities, and infrastructure. Auto industry experts (see figure 1) also welcomed the merger, although analysts from firms that were not involved in the merger (Goldman Sachs and CSFB advised Daimler-Benz and Chrysler) were more cautious in their long-term performance forecasts and recommendations.
The Chrysler Board unanimously approved the merger and recommended the transaction as fair to and in the best interests of Chrysler's stockholders. The board suggested several factors that led to their approval (DaimlerChrysler, 1998): They spoke of the likelihood that the automotive industry will undergo significant consolidation, resulting in a smaller number of larger companies surviving as effective global competitors. They argued also with the two companies' complementary strengths as being important for a merger. Daimler-Benz is stronger in luxury and higher end cars, and Chrysler is stronger in sport-utility vehicles and minivans; Daimler is stronger in Europe, Chrysler in North America; Daimler's reputation for engineering complements, Chrysler's reputation for product development. Another important point were the opportunities for significant synergies afforded by a combination based not on plant closings or lay-offs, but on such factors as shared technologies, distribution, purchasing, and know-how. Finally, they expected benefits of $1.4 billion in the first year of merged operations, and annual benefits of $3 billion within 3 to 5 years. The Chrysler Board also outlined several potential risks, including the difficulties inherent in integrating two large enterprises with geographically dispersed operations incorporated in different countries, and the risk that the synergies and benefits might not be fully achieved.
The Daimler-Benz Management Board also unanimously approved the merger by taking several other material factors into account. Daimler's strengthened competitive position through an immediate expansion of its automotive product range and through a geographic expansion in the U.S., and thus reducing the risk associated with the dependency on the premium segment of the automobile market. It enhanced liquidity for Daimler's stockholders by creating the third largest automotive company in the world in terms of revenues, market capitalization and earnings. Finally the potential short-term synergies in purchasing, distribution, and research and development, and the potential long-term synergies in the development and growth of markets were mentioned.
Brunner et al. (1999) consolidated the main benefits for Chrysler, for Daimler-Benz and also the shared benefits quite clearly, to have a good overview about the main benefits.
In this chapter the author will analyse and conclude the findings that have been gathered by the literature review and the findings of the case study which has been chosen.
6.2. Analysis of Internationalisation
As Clark (2005) already stated, companies that try to gather experience by internationalisation due to alliances often fail, however an acquisition would be more successful. Kwon & Kopona (1993) stated also that the decision should relate to the company’s corporate strategy. When coming to the decision of internationalisation Dunning (1988) declared that the local advantages of countries play an important role. The main country advantages can be classified as economic advantages, consisting of quantity and quality factors such as transportation, production, scope and the size of the market. Then there are political advantages that include government policies which have a positive influence on the market entry. And finally there are social and cultural advantages, which implicate the physical distance between the home country and the foreign country, language and cultural diversities and the general attitude towards foreigners.
In the case of Daimler-Benz AG the company, in a diversification and globalisation move, announced plans in September 1993 to build a $300 million assembly plant in Alabama. The interest in the internationalisation can be located in the acceleration of the ambitious ‘globalisation strategy’ in the case of Daimler-Benz, and the assurance and consolidation of the risky ‘innovation and flexibility strategy’ in the case of Chrysler (Freyssenet et al. 1998). Schrempp established a new strategic concept with five principles (TÃ¶pfer, 1998; Daimler-Benz Annual Report, 1996). One point was globalisation which pointed out that the globalisation of the core business by foreign direct investment, strategic alliances and M&A complete the radical corporate restructuring. Daimler's strengthened competitive position through an immediate expansion of its automotive product range and through a geographic expansion in the U.S., and thus reducing the risk associated with the dependency on the premium segment of the automobile market.
For the Chrysler Corporation an internationalisation would make sense due to the grounds that only 7% of their whole sales are made oversees. Chrysler failed several times to enter the European market as they were trying to broaden their product portfolio perspective as de Witt & Meyer (1998) stated. According to the value chain model of global strategy Chrysler had a country centred strategy with subsidiaries operating quite independently (Porter, 1985). Furthermore, Chrysler spoke of the likelihood that the automotive industry will undergo significant consolidation, resulting in a smaller number of larger companies surviving as effective global competitors.
Both companies are still facing the task of entering their respective markets and the emerging Asian markets, where joint ventures and alliances have so far not achieved their objectives.
The results for the reasons of internationalisation show that the advantage of an internationalisation is an opportunity for both companies. Daimler-Benz AG is far more international due to the factor of having plants already established in the United States and sales in their home European market are 63%. Respectively 37% are therefore sales in other markets. For the Chrysler Corporation it is even more attractive as their sales are 93% in their home market and only 7% in other markets. This can be a good opportunity for them to increase sales especially on the strong European market.
6.3. Analysis of Synergy
Weston and Weaver (2001) stated quite clearly that the main target is synergy or efficiency for a merger, in which total value from the combination is greater than the sum of the values of the component firms operating independently. Georgopoulus (2008) lists some main reason for merging such as to establish economies of scale, to be able to reduce costs due to redundant resources and finally the probable undervaluation of the stock of the firms from a particular country. As a final reason he argued with the macroeconomic differences between two countries. As Colombo et al. (2007) stated, synergy is probably the most often cited justification for an acquirer to pay a premium for a target company. Coyle (2000) classified synergy as the additional benefit that can be derived from combining resources of the bidding and target companies and as the “two and two makes five” effect. Ansoff (1986) even defined four different types of synergies. Management synergy, investment synergy, operating synergy and finally sales synergy.
However, in a recent book by Mark Sirower (1997) he argues that synergy rarely justifies the premium paid. Sirower declares, “many acquisitions premiums require performance improvements that are virtually impossible to realize even for the best managers in the best of industry conditions” (p.14). And even managers have been heard to comment that costs reductions are the merger benefit that is most likely to be achieved whereas the achievement of synergy is highly uncertain.
Due to the geographical implantation, the product range and the brand images offer a nearly ideal complementary picture with minimum of overlapping, therefore both companies do not compete with each other or just to a certain degree. “Both companies have product ranges with world class brands that complement each other perfectly. We will continue to maintain the current brands and their distinct identities” (Waller, 2001).The synergies achieved through the merger will not be so much in production but in opening markets, in purchasing, and in research and development competencies. This will lead to further synergies for both of them. This interesting attempt consists of combining the Chrysler strategy of permanent innovation and the Daimler-Benz strategy of high-tech quality to gain technology and innovation leadership in a variety of markets. Both companies can therefore gain from the strength of the other company and accordingly learn a lot. The global sourcing permits a stronger bargaining position in supplier relations, obtaining lower prices, particularly for high-volume standard components. The most interesting and most worrying for competitors, is the synergy potential for areas of research, development and design. Here, both companies were leaders in some segments and can therefore mutually reinforce their positions (Freyssenet et al. 2003). Moreover, both companies are trying to expand geographically in their respective markets, and immediate growth opportunities will exist by using each other's facilities, capacities, and infrastructure. Economies of scale and scope can therefore be established as already stated in the literature review.
As the author had a closer look at all the synergy effects and the fact that economies of scale and scope could be established, he thought of a perfect match between Daimler-Benz and Chrysler. However, as Sirower (1997) already declared, it is far easier for merging companies to reduce costs rather than to create synergies. But still the enormous amounts of possible synergies predominate the fact that “only” costs could be reduced. And even if only cost can be reduced, this will still be a success for the merger between those two companies.
Regarding to the analysts’ statements, even they think that Daimler and Chrysler would make a decent match.
6.4. Analysis of the Merger
As Gonzalez et al. (1998) already stated, the research shows that one important driver of cross-border mergers and acquisitions may be undervaluation. A driver of cross-border mergers might be differences in the macro-economic conditions in two countries. According to Hitt et al. (2001) the reasons for cross-border acquisitions include market power, overcoming market entry barriers, covering the cost of new product development, increasing the speed of entry into a market, and greater diversification. Cross-border acquisitions can produce both economies of scale and economies of scope. They help a firm enter new international markets and thereby enhance their ability to complete in global markets. Of course, cross-border acquisitions are even more challenging to complete successfully than acquisitions of domestic firms.
Daimler's strengthened competitive position through an immediate expansion of its automotive product range and through a geographic expansion in the U.S., and thus reducing the risk associated with the dependency on the premium segment of the automobile market.
The Chrysler Board also outlined several potential risks, including the difficulties inherent in integrating two large enterprises with geographically dispersed operations incorporated in different countries, and the risk that the synergies and benefits might not be fully achieved.
The global sourcing permits a stronger bargaining position in supplier relations, obtaining lower prices, particularly for high-volume standard components. Moreover, both companies are trying to expand geographically in their respective markets, and immediate growth opportunities will exist by using each other's facilities, capacities, and infrastructure.
According to the literature review only a few points match with the actual strategy. Daimler-Benz was far more interested in strengthen their position in the U.S. market and not overcoming market entry barriers. Chrysler on the other hand was far more suspicious if all this can work out and explained about some negative aspects of this cross-boarder merger. However, both companies take into account to have possible synergies and benefits.
Basically, the signs for a successful merger cannot be ignored as the synergies and common interest are vast.
In this chapter the author shows the conclusion which have been drawn from the results of this study. These results were mainly obtained through studying theories.
In the initial stage of this thesis the author tried to explain what the main reasons were for Daimler and Chrysler to fuse to become one big company. Furthermore this chapter will distinguish whether the reasons for merging were equivalent for both companies and if this corporation has been the right decision for both companies in terms of equal synergies.
Finally, this chapter will provide an opinion regarding the practicalities of adopting the theoretical approaches discussed in the literature review within the real business.
During the thesis different theories about mergers were studied. The author tried to find out information that would lead him to proper answers. On the basis of these theories and research findings, a conclusion can be drawn about the information gathered.
Successful international growth can be achieved through strategic alliances and mergers. In order to decide for a merger, both companies are willing to loose a part of their identity. Not like a strategic alliance where only knowledge is exchanged, mergers offer a far wider range of possibilities for both companies. When planning a merger, there are several facts that have to be considered. Firstly, one has of course evaluate the external environment, the arising chances, and the financial data in order to decide, whether the chosen companies provide the opportunities need for a fruitful merger. Projected cash flows have to be balanced, while the uncertainty about the other firm and of course about the future have to be minimized.
In the case of the DaimlerChrysler merger both companies Daimler-Benz AG as well as Chrysler Corporation saw their advantage to merge with the other one. As expected, a lot of facts were indicators for a perfect match between those two companies regarding the compatibility of their respecting partner. They found out that the Daimler-Banz AG as well as the Chrysler Corporation were a perfect match in terms of product lines, regional penetration and operational strength. Through the firm’s assets, skills, and capabilities, Daimler-Benz’s cars had become known widely for their luxury and sterling engineering. Using its resources, Chrysler had become renowned for its low-cost manufacturing of minivans, sport utility vehicles, and trucks. It can be said that Daimler-Benz was expected to contribute its core competence of engineering, while Chrysler was considered to be the specialist in low-cost manufacturing as well as design. Both companies were known for their high quality standards and their strong culture of innovation. In terms of geographic coverage, Chrysler had chosen to remain virtually a domestic producer, deriving 93 percent of its sales from the United States market. Daimler-Benz, on the other hand, had developed distribution channels in multiple countries and was generating 63 percent of its revenues throughout all of Europe rather than only in Germany, its domestic market. A merger will allow each of the companies to strengthen its position in its partner’s home market through the sharing of complementary resources. Similarly, Chrysler’s low-cost production expertise is to be melded with Daimler-Benz’s superior engineering skills to generate new products for both companies. The companies could speed up production innovation, save costs and might even use the same vehicle frames by blending research and development to create Mercedes and Chrysler vehicles. Resources could also be saved in warehousing and logistics for spare parts. Besides this, there is only few overlap in respect to the automotive portfolios, so that the competition is supposed to be minimized. Finally, the market entry considerations, especially for Chrysler, who was trying to enter the European market. Overall, it can be said that the external conditions seem to be optimal.
Even analysts from different investment-banks said that the deal would make sense.
7.2. Recommendation for further Studies
An idea for further studies would be the research of other mergers and compare them with the DaimlerChrysler merger. This could have been very interesting to what extend other companies share synergies and why they decided to merge. Another possibility for further studies would be the research why the merger between those two companies actually failed and what could have been done to prevent it. One last recommendation is that it could have been interesting to investigate the post-merger integration process of DaimlerChrysler and how they acutally handled it.
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