The Fall of a Dream Merger

Back in 1998, experts called Daimler and Chrysler’s union a marriage ‘made in heaven.’ But about a decade after, the perfect union has reached a critical juncture. How did the union hit the rocks?

On Sept. 15, DaimlerChrysler AG’s CEO stunned the world by forecasting a $1.5 billion third-quarter loss for the Chrysler Group. The executives know they are all in trouble but nobody has ever imagined how grave the trouble could be.

After a number of profitable quarters, Chrysler had collapsed inwardly. Its erratic sales performance triggered Daimler’s decision to sell it off before it capsizes the whole company. Chrysler would be sold for $7.4 billion to private-equity giant Cerberus Capital Management.

But with the said decision, pressure intensified. It does not only mark the failure of a merger but also includes a bunch of other struggles. Inventories of unsold product lines were suffocating the dealers. Also, negotiations on the new company policies are choking workers. "It shows the problems of the fusions of big companies," said Willi Diez, the head of the Germany-based Auto Industry Institute. "You have cultural differences. You have the problem of who really runs the company."

In interviews with a number of individuals close to Daimler to reconstruct pivotal events leading up to the May 14 sale of Chrysler, most spoke on the condition of anonymity.

When Zetsche became Daimler’s CEO, no one thought he would sell Chrysler. Like power antennas, Zetsche was famed for efficiently leading Chrysler’s path to solidify the merger. But Zetsche became ultimately disappointed by the lack of synergies between Chrysler's mass-market vehicles and the luxury product lines built by Mercedes-Benz. As a result, Chrysler inventories became bloated and heavy incentives failed to push vehicles off dealer lots. The warning on Sept. 15 turned concerns about Chrysler into a full-scale predicament.

People close to Zetsche said that he truly believed that Daimler could become an integrated powerhouse if Mercedes and Chrysler shared more engineering costs and high-volume parts. He strived hard for more cooperation, and initiated the development of common platforms for small-car and SUV product lines. Nonetheless, the joint projects only underscored the huge differences between a Mercedes and a Chrysler. While engineers could unite, they could not change the fact that a small Mercedes car sells for double the price of a Chrysler compact.

Many Mercedes auto parts were simply too expensive to be part of a Chrysler vehicle. Still, Zetsche insisted. One German exec recalled challenging the idea that integration could work. "Thank you for your opinion," Zetsche told him. "I have a different one. We will go on with the cooperation."

While Daimler struggled to solve its Chrysler problem, the company's shareholders were swiftly losing patience. Influential shareholders pressed Zetsche and Bodo Uebber, DaimlerChrysler's chief financial officer, to sell Chrysler. "Zetsche's pressure comes from so many different constituencies telling him they're sick to death of Chrysler," said John Lawson, a London-based analyst at Citigroup.

In private, Zetsche was ratcheting up the pressure on LaSorda and his team. No one felt the pressure more than Joe Eberhardt, a former Mercedes exec who was in charge of Chrysler sales and marketing. Eberhardt had alienated many Chrysler dealers with his autocratic style during the terrible summer of 2006. He resigned on Dec. 5.

Early this year, Zetsche appeared reconciled that a sale was the best option. "It took him awhile to get to this decision, that it was right for Daimler and Chrysler to separate," said a person close to Zetsche. Valentine's Day 2007 was supposed to mark a fresh start for Chrysler simply because the marriage was officially headed for a divorce.