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Merging "Denver,' "Cleveland'

Published Sep. 13, 2005

The road to the biggest industrial merger ever started with a 17-minute meeting Jan. 12 at Chrysler Corp.'s sleek new headquarters complex in suburban Detroit. It wound through luxury hotels in New York City, executive dining rooms at Deutsche Bank AG's headquarters in Frankfurt, Germany, and a secret rendezvous in Switzerland before ending with a champagne toast at London's Dorchester Hotel at 10:30 p.m. Wednesday.

In between, there were a dozen or more secret meetings between a handful of high-level executives of Daimler-Benz AG and Chrysler shuttling across the Atlantic. The deal survived tough negotiations over the value to be placed on Chrysler stock, a struggle to find a legal structure to combine the German and American operations and, at the very last, a debate over what the combined company should be called.

Somehow, the two sides and the platoons of lawyers and investment bankers who ultimately joined the discussions kept a lid on their secret until the deal was almost done.

As in any big deal, devils are apt to lurk in the details. Chrysler chairman Robert Eaton and Daimler-Benz chairman Juergen Schrempp allowed during a London news conference Thursday that they hadn't figured out such things as whether the new DaimlerChrysler, as a German company, would qualify to ship cars across the U.S.-Canadian border duty-free. Nor have they fully sorted out how the two engineering and manufacturing operations will be joined for maximum cost savings.

That sort of nitty-gritty wasn't what Schrempp was thinking about when he called Eaton while attending the Detroit Auto Show in early January. The message: Could the Daimler chief stop by for a meeting, one-on-one?

When they sat down, Schrempp's agenda was audacious. Chrysler and Daimler, the German executive said, should explore the possibility of a merger.

The idea didn't come entirely out of the blue. For about eight months in 1995 and 1996, the two companies had discussed the possibility of a major joint venture in South America or Asia, where neither was a major player. Those talks came to nothing, but executives from the two companies got to know each other and became comfortable with one another's corporate culture.

Where half-measures had failed, Schrempp's let's-go-all-the-way pitch captured Eaton's imagination.

"I had been thinking about the same thing," Eaton told his guest. The two men shared the view that the industry was heading rapidly into a period of brutal competition and consolidation that could leave fewer than a dozen independent automakers on the world stage in 10 years, compared with the 20 or so there are now.

By the time Schrempp left Chrysler headquarters, he knew Eaton was intrigued. Within a couple of weeks came a more formal response: "I would be interested in pursuing it." The Chrysler board was notified at an already-scheduled meeting Feb. 5, and a week later Eaton and chief financial officer Gary C. Valade flew to Europe for a meeting with Schrempp and another Daimler executive. Project Gamma was under way.

Secrecy was an obsession as the talks progressed. The companies used code names for each other to help keep things under wraps. Chrysler was "Cleveland;" Daimler was "Denver."

Even the whisper of a merger could have driven up Chrysler's stock price and undone the deal.

Concern of a leak led Eaton to limit knowledge of the talks to about 10 senior Chrysler executives. Each time a new one was let in on the secret, he was told bluntly: "We're telling you today and it hasn't leaked out yet. So if it leaks out, it's you."

Concerns for confidentiality also led Daimler and Chrysler executives to seek out-of-the-way meeting places and in some cases to put up with grueling travel. For their meeting in early February, Eaton and Valade took an overnight flight from Detroit, landing the next morning. But when they arrived at their Frankfurt hotel, Eaton's room wasn't ready. Their pilot let Eaton use his shower.

For all that, the meeting lasted only four hours, in part so the Chrysler executives could leave Europe by 6 p.m. and be back in Detroit the same night. Being out of the office one day isn't unusual, but a longer trip might have raised eyebrows, especially as Chrysler has almost no business in Europe. But the discussions, involving Schrempp, Eaton, Valade and Eckhard Cordes, the Daimler board member responsible for group strategy, continued on the positive tone set by the chief executives' initial conference.

Officials on both sides say the business logic of a combination was clear to them from the start. Chrysler had the highest profit per vehicle among Detroit's Big Three and was one of the most profitable carmakers anywhere. But it lacked any major presence outside North America, a major handicap as the U.S. market's growth stagnated.

Globally, the industry offered a grim picture: far too many factories building far more vehicles than consumers would ever buy. And on the horizon, demands for costly investments in new engine technology to slash pollution.

"We would have had to gear up substantially because of alternative power plants," Eaton said. By merging with Daimler, "we'll free up resources there for additional market entries."

Then, of course, there was the usual list of benefits: merging financial operations, consolidating support services such as trucking or accounting, and carrying more clout into talks with suppliers. DaimlerChrysler figures it can shave $300-million a year from the two companies' $60-billion in combined annual purchasing outlays, Eaton says. The savings, though, are likely to be less significant than in mergers among direct competitors. Schrempp and Eaton say they plan to expand production capacity and eventually add jobs.

From Daimler's perspective, Chrysler was an excellent match. It had the U.S. distribution network the German company lacked, it had solid entries in the lower end of the car market, and it had a powerful, profitable franchise in the U.S. light-truck market with its minivans and Jeep sport-utility vehicles.

And Eaton, looking into a turbulent future, says he saw a unique opportunity in Schrempp's overture. "We had the ability to choose our favorite partners," Eaton said. "It would be a merger of equals."

From the beginning, though, the form a merger would take and how "equal" it would be presented sticky challenges. At this point, investment banks and law firms were brought in.

A series of meetings ensued during February and March. Many were in London, usually at the Dorchester but sometimes at the Grosvenor House in the ritzy Mayfair neighborhood. In New York, the parties would gather at the Four Seasons or the Pierre. But they never walked anywhere together, lest they run into someone who knew them.

On March 2, Eaton and Valade went to the Geneva Auto Show in Switzerland. With that place crawling with auto executives, they did their negotiating in Lausanne. Discretion was clearly needed, because Valade, as a finance guy, rarely attends auto shows. Indeed, at one point a Chrysler executive who wasn't in the know told Valade there was "a lot of speculation in Auburn Hills because you're here." Valade deflected the query.

The Lausanne meeting with Daimler, at a lakeside hotel, lasted five hours. The executives agreed on the general structure and who the key executives would be, but they put off a crucial detail: the exact share-exchange ratio.

Although the deal was billed as a merger of equals, the transaction is effectively a German company taking over Chrysler through a stock swap.

The Daimler side agreed that Chrysler shareholders should get a premium, but not as much as Eaton wanted. On April 15, the sides agreed on a rate about midway between each other's offers.

Eaton and Schrempp, meanwhile, had resolved an issue that has been the undoing of some other proposed megamergers: who would run the show. The compromise they struck is an artful one. Eaton, 58, and Schrempp, 53, will act as co-chief executives for three years to meld the companies.

Explaining it Thursday, Schrempp vowed that he and Eaton would agree on all major decisions. If not, he said, "the two of us will resign." After three years, Eaton will step aside and Schrempp will take command. Schrempp said that after him, Daimler's CEO won't necessarily be a German, just whoever "is best for the company." In a sign of its new global reach, the company will make its official internal language English.

At this point in the talks, just two issues remained: how to break the news and what to call the combined company.

The matter of the name was "the very last issue" addressed, Eaton says. It also was one of the toughest, seeming to focus all the larger doubts and worries inherent in such a giant international transaction. "It was very emotional issue at the end, emotional on both sides," Schrempp said. "We both felt strongly."

Chrysler executives proposed Chrysler Daimler-Benz. Their German counterparts pushed for Daimler-Benz Chrysler. Both sides had reason to be deeply attached to their names. The German company's two founders were Gottlieb Daimler and Carl Benz. Walter P. Chrysler, a legendary Detroit automotive pioneer, largely created Chrysler Corp. in 1925 from the wreckage of failed predecessors. The name problem "wasn't a deal breaker," Schrempp said. "But there was a standoff."

Finally, on Tuesday, they agreed on DaimlerChrysler. "It looked great and had a lot of class to it," Eaton said.

Schrempp says the two companies never considered an entirely new name. "We are in a business of emotions. Daimler and Chrysler are historical names and mean something" to both customers and employees, he said.

But the negotiators had another problem: Their veil of secrecy was shredding, and certain people had to be told. Among those informed were officials of the U.S. Federal Reserve. Deutsche Bank, which holds a 21.8 percent stake in Daimler, wanted assurances it wouldn't face regulatory problems, as it does business in the United States. American banking rules frown on banks holding large stakes in industrial companies, in contrast to Germany, where it is common. In the combined corporation, Deutsche Bank's stake will be 12 percent.

United Auto Workers president Stephen Yokich, at a Detroit news conference, said he had learned of the talks Tuesday in a call from Dennis K. Pawley, Chrysler's executive vice president of manufacturing. Although Yokich said there are still a lot of questions about the merger, including what labor's representation at the combined company will be, the union leader was optimistic about the merger and called it a "win-win situation."

Wednesday morning, after news of the talks broke in the Wall Street Journal, Schrempp and Eaton sat down for breakfast at the offices of Deutsche Bank with Hilmar Kopper, the bank's former chairman and head of Daimler's supervisory board.

The deal was clinched Wednesday evening at the Dorchester Hotel in London. Schrempp and Cordes signed for the Daimler side and Eaton and Valade for Chrysler. Champagne flowed.

Thursday morning, about 200 journalists flocked to the official announcement at an arena in London's Docklands. Schrempp and Eaton were greeted almost like rock stars, cameras flashing as they stood in the television lights.

This was no ordinary business combination, said Schrempp: "This is a merger that will change the face of the industry forever."