Friday, May 18, 2007

A Tale of Two Mergers: Daimler Chrysler and OSIM International

Earlier this week, Cerberus Capital Management acquired an 80% controlling stake in Chrysler. In the process, the automotive manufacturing firm was de-merged from DaimlerChrysler in what has been called a 'divorce on earth', reversing what was hailed a merger that was termed a 'marriage in heaven' when Daimler Benz merged with Chrysler in 1998.

The performance if the merger, in retrospect, was abysmal. Daimler paid $36 billion for Chrysler, only to spin-off the company at a massive loss several years later. In the process, destroying shareholder value and grossly underperforming the market.

As we can see from the charts, in the years following the merger shares of Daimler lost 60% of their value, only recently recovering and experiencing a jump closer to the divestment of Chrysler. What went wrong?

In an earlier post, some comments were cited on why mergers go wrong:

"Mergers of equals seldom work because of ego and wallet issues. The target's top managers are not willing to get demoted, the target's corporate culture doesn't fit well with the buyer, the buyer doesn't have enough spare money to fix the unforeseen issues, etc."

The brand identity of Chrysler and Daimler did not really fit - Mercedes Benz cars are known to be quite a different breed from Chrysler automobiles. Further, there was the challenge of merging a company with two very different corporate cultures - American Chrysler and German Daimler. The economies of scale, collaboration of technologies, and project synergies between the two companies failed to materialise.

In Singapore, OSIM, an international lifestyle products retailer not too long ago made an acquisition of American retail chain Brookstone. And since the merger, OSIM's stock price has followed a similar trajectory to Daimler's after its acquisition:

The stock has crashed from its high of $2 to a dismal $0.70 of late. And there seem to be traits that the company has in common with the Daimler-Chrysler Merger. There are two very different corporate cultures operating here. An Asian corporate culture operating in OSIM, and an American culture in Brookstone. OSIM sells mainly high margin, upscale market products, while Brookstone sells many small, lower margin products. OSIM was also profitable all year round, while Brookstone only during the holiday season. To add to the problem, OSIM's core business suffered a set back earlier this year, when it posted its first quarterly loss in a long while. Also, it is pertinent to note that Brookstone and OSIM are about the same size. This is not a case of a big company making a small acquisition.

Does this seem to be history repeating itself, albeit in a different permutation? Will OSIM's performance continue to suffer up till the point when it decides to divest its stake in Brookstone? Only time will tell. But if I had to bet, I'd bet on this being a historical replay. We all remember what happened after AOL swallowed Time Warner, don't we?

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