570 Making Key Strategic Decisions
In this case, Quaker ’s management was guilty of two mistakes: failure to ana-
lyze Snapple’s products, markets, and competition correctly and overconfi-
dence in their ability to deal with the problems. Either way, their lapses cost
Quaker ’s shareholders billions.
Although the jury is still out on the Daimler-Chrysler merger, analysts al-
ready have assigned at least some of the blame. There were culture issues from
the start, and it quickly became apparent that co-CEOs were not the way to
manage a $130 billion global giant. Chrysler CEO Robert Eaton left quietly at
the beginning of 2000 and there were other departures of high-level American
executives. Morale suffered as employees in the U.S. realized that the “merger
of equals” was taking on a distinctive German f lavor and in November 2000,
the last remaining Chrysler executive, U.S. president James Holden, was fired.
Rather than deal with these issues head-on, Daimler CEO Jergen
Schremp took a hands-off approach as Chrysler ’s operations slowly spiraled
downward. The company lost several top designers, delaying new product in-
troductions and leaving Chrysler with an aging line of cars at a time when its
competitors were firing on all cylinders. The delay in merging operations
meant cost savings were smaller than anticipated as were the benefits from
sharing technology. Finally, analysts suggested that Daimler paid top dollar for
Chrysler at a time when the automobile industry in the U.S. was riding a wave
of unprecedented economic prosperity. As car sales began to sag at the end of
2000, all three U.S. manufacturers were facing excess capacity and offering
huge incentives to move vehicles. This was not the ideal environment for
quickly restructuring Chrysler ’s troubled operations and Daimler was facing a
35% drop in projected operating profit between 1998 and 2001.
Conclusions: These three case studies highlight some of the difficulties
firms face in achieving profitable growth through acquisitions. Managerial
hubris and a competitive market make it easy to overestimate the merger ’s
benefits and therefore overpay. A deal that makes sense strategically can still
be a financial failure if the price paid for the target is too high. This is espe-
cially a problem when economic conditions are good and high stock prices
make it easy to justify almost any valuation if the bidder ’s managers and direc-
tors really want to do a deal. Shrewd managers can sell deals that make little
strategic sense to unsuspecting shareholders and then ignore signals from the
market that the deal is not a good one.
The previous examples make it clear that it is easy to overstate the bene-
fits that will come after the transaction is completed. Whatever their source,
these benefits are elusive, expensive to find and implement, and subject to at-
tack by competitors and economic conditions. Managers considering an acquisi-
tion should be conservative in their estimates of benefits and generous in the
amount of time budgeted to achieve these benefits. The best way to accurately
estimate the benefits of the merger is to have a thorough understanding of the
target’s products, markets, and competition. This takes time and can only come
from careful due diligence, which must be conducted using a disciplined