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News Summaries
The Daimler-Chrysler Merger
Late
on the night of May 6, 1998, executives of Chrysler Corporation
and Daimler-Benz agreed on a $40 billion merger, creating the
world's fifth largest automobile manufacturer. Most industry
analysts consider the merger a good match, with each company's
strengths compensating the other's weaknesses. Prior to the merger,
Chrysler Corporation was the world's sixth largest car company,
with $61.2 billion in annual revenues, $60.4 billion of assets
and 121,000 employees. In 1997, Daimler-Benz, the fifteenth largest
auto maker had revenues of $68.9 billion, $76.2 billion in assets,
and slightly more than 300 employees. Chrysler was considerably
more profitable in 1997, with a profit margin of 6.3%, compared
to 2% at Daimler-Benz. The variation in profit margins reflects
differences in management philosophy: Chrysler, if necessary,
is willing to sacrifice quality for profit; while the Daimler-Benz
motto is quality at all costs. Daimler -Benz has a healthy cash
flow, but little potential for growth. Chrysler, on the other
hand, has growth potential, but little excess cash.
The new company, Daimler-Chrysler,
valued at $40 billion, is expected to generate sales of $130 billion
and employ more than 400,000 people. The merger is a large step
in the globalization and consolidation of the automobile industry.
Daimler-Chrysler ranks behind the largest company, General Motors,
which owns Opel and has controlling interest in Saab; Ford, the
second largest, owner of Jaguar and one-third of Mazda; Toyota,
the third largest; and Volkswagen/Audi/Rolls Royce, the world's
fourth largest car company.
The merger offers several advantages,
including cost savings, increased revenues, and larger global
market shares than either company had individually. The new company
expects to save approximately $7 billion by combining research
and development in areas such as safety and fuel technology.
By purchasing common parts, such as engines, transmissions, door
locks and seats, Daimler-Chrysler anticipates savings of $1.2
billion to $5 billion annually for the next several years. Although
the two CEOs, Juergen Schrempp and Robert Eaton, have not predicted
lay-offs, the cost of labor is higher in Germany, and some labor
representative worry that labor force downsizing may be another
area of potential cost saving.
The combined companies are expected
to have increased sales of 75,000 vehicles. The merger with Daimler-Benz
will help Chrysler build its markets outside of the United States;
while Chrysler's marketing can help create much needed mass appeal
for Mercedes. Chrysler, maker of the most popular minivans,
can help Daimler Benz design a minivan for the European market.
Daimler-Benz, with plenty of cash and experience in producing
luxury cars, can help Chrysler with the production of the Chronos,
its new super luxury sedan.
Questions:
- What economies of scale will be achieved
by the Chrysler-Daimler merger ?
- What factors in the merger might
create diseconomies of scale?
- Will the merger create more competition
in the global automobile market?
Keywords:
economies of scale, diseconomies of
scale, costs of production, merger, market share
Sources:
Ingrassia, Lawrence and Mitchener, Brandon,
"Merging Lanes," The Wall Street Journal, May
8, 1998, p1.
Lipin, Steven and Mitchener, Brandon,
"Daimler-Chrysler Merger to Produce $3 Billion in Savings,"
The Wall Street Journal, May 8, 1998, p.A10.
Seaman, Barrett and Stodghill, Ron,
"The Daimler-Chrysler Deal," Time, May 18, 1998,
pp66-69.
PUTTING MA BELL BACK TOGETHER AGAIN?
(06/97)
In 1984, AT&T was separated into seven smaller local service
companies, the Baby Bells, and one long distance carrier, AT&T.
The purpose of the breakup was to allow smaller, newer companies
to be able to compete in the local and long distance service markets.
The deregulation proved to be successful in lowering prices for
consumers and in providing profits for stockholders, whose old
shares of AT&T were converted into smaller shares of AT&T
and the Baby Bells. The day before the breakup in 1984, one hundred
shares of AT&T was worth $6052; if investors did nothing,
keeping the shares of AT&T and Baby Bells for which the original
shares were swapped, their stock would be worth $58,396 today,
an 18.2% annual return on the original investment.
Industry analysts believe that the smaller companies were easier
to manage and have the ability to grow more rapidly than a company
like Ma Bell, which had already grown to mammoth proportions.
In addition, competition from other non-Bell local service companies
forced the Baby Bells to operate as efficiently as possible.
Customers benefited from the lower rates made possible by the
reduction in costs.
Given the benefits and successes of the spin-off companies, economists,
policy makers, and stockholders alike are somewhat puzzled at
AT&T's plan to purchase SCB Communications, a regional phone
operator. SCB is the old Southwestern Bell plus its recent acquisition,
Pacific Telesis, another former Baby Bell. According to AT&T
officials, the remake of Ma Bell may be necessary to compete globally
in the twenty-first century with such giants as British Telecom
and Nippon Telephone.
Questions
- Given the shape of the long-run average cost curve, explain
how the creation of 7 smaller companies eventually lowered average
costs.
- Why will rebuilding AT&T possibly lead to more competitive
pricing in global competition?
- Explain how opposite policies can achieve the same results
in different situations.
Keywords: average costs, long-run costs, short-run costs,
economies of scale, deregulation
Sources: Kadlec, Daniel. "Phone Pranks." Time.
June 9, 1997, p.46.
Underwood, Jerry. "AT&T Could Offer Local Service in
Months." The Birmingham News. February, 9, 1997, p.
D1.
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