Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice, and call me Chrysler?
The automotive industry has been abuzz with discussion of a potential merger between two of the larger firms in the industry. Earlier this year, Fiat-Chrysler CEO Sergio Marchionne reached out to the CEO of General Motors, Mary Barra and suggested the two companies merge.
As details of the suggestion became public, Marchionne made his position clear. Marchionne argued that R&D costs in the automotive industry are simply too high, and that mergers across the industry are coming. General Motors, for their part, did their best to appear equal parts surprised, confused, and uninterested by the offer. Barra recently announced that GM stockholders seemed decidedly listless in regards to the potential deal.
While Marchionne has done a number of positive things for Chrysler, I would argue that this merger, were it to occur, would likely do more harm than good for both firms. Not only would Marchionne’s dreams of reduced R&D costs likely never be realized, but Chryslers own experience with mergers should suggest that shared management structures rarely end well for the company.
On the surface it seems quite intuitive. Company A spends billions of dollars in R&D every year developing cars, and company B spends billions a year doing the same. Slap them together and they could develop the same stuff with half the billions, right? While the intuition is pleasant, a study of 31 mergers by Cassiman et al. (2005) suggest that horizontally merged firms with similar R&D departments actually reduced R&D. “When merged firms are technologically substitutive, key employees tend to leave more often, the R&D portfolio becomes more focused, the R&D horizon becomes shorter and internal funds available to R&D decrease.”
In the case of Chrysler and GM, who both spend significant amounts of money developing their full size pickup trucks (The RAM and Silverado), it is unlikely that the merger would either reduce costs or produce significantly higher quality trucks for the same R&D input.
Marchionne has another thing working against him, history. In my lifetime alone Chrysler has changed ownership three separate times, usually with less than stellar success. The most recent merger with Fiat automobiles, completed in 2012 does not seem to be going terribly, however the investment firm Cerberus, who bought the company at the pit of the recession, handled the company less than wonderfully. Cerberus, a company normally well equipped to swoop in and clean up management structures and flip firms for a profit, was not even remotely prepared for the massive monster that was the Chrysler they inherited.
Why was the company Cerberus inherited such a mess? Because the previous owner, Daimler-Benz had wrung Chrysler dry. In 1998 Daimler-Benz merged with Chrysler, promising huge synergies and massive R&D benefits for both firms. A merger of equals it was called. The reality differed significantly from the sales pitch. Daimler ran the show, took what it wanted, gave Chrysler very little, and in general left Chrysler out to dry. In the end the merger left Chrysler with nothing but a bad reputation a billions lost.
Marchionne is an impressive businessman, and one who seems to have done right by Chrysler thus far, but he has both a mountain of history, and a battle against empirically evidence suggesting systematic overestimations of synergy savings to overcome if he wants to make a GM-Chrysler merger work.