Economies of scale suggest merger

Stuttgart, May 22, 2006
  • June 1926: Foundation of Daimler-Benz AG
  • Successful step: Merger of Daimler-Motoren-Gesellschaft and Benz & Cie.
  • Rationalization effects in production, sales and organization
On June 28/29, 1926, Daimler-Benz AG was created by the merger of Benz & Cie. and Daimler-Motoren-Gesellschaft. On those two days, the general assemblies of the two companies approved the merger. In formal terms, the merger was accomplished by a stock swap at a ratio of 1:1, with Daimler-Motoren-Gesellschaft (DMG) acting as the absorbing company and changing its name to Daimler-Benz AG. In terms of commercial law, the new company was domiciled in Berlin, as had DMG been before, while the headquarters was located in Stuttgart-Untertürkheim. The Board of Management was made up of equal numbers of board members from the two predecessor companies, without superiority of one or the other party being discernible. This was underlined by the fact that for the time being, no chairman of the board was appointed. It was only at a later stage that Dr. Wilhelm Kissel from Benz became the leading personality at Daimler-Benz AG.
The reasons for the merger were to be found in the economic situation after World War I. The German motor industry saw itself faced with a structural crisis having to convert production to civilian goods. As a result, new motor manufacturers established themselves in the market – their number rising to over 120 in those years. Traditional companies like Benz & Cie. and DMG were suddenly faced with fierce competition. Their prices increasingly came under pressure. For the time being, the two companies only had technically outdated pre-war vehicles to offer. Moreover, they operated huge plants with large workforces whose capacities were far from being fully utilized. As if this had not been enough, sales were in a desolate state after the war, especially because German manufacturers were no longer allowed to export their products under the stipulations of the Treaty of Versailles. But things didn’t look all that bright in the domestic market, either.
These factors almost dictated economies of scale which in turn suggested the cooperation of the two manufacturers in southern Germany. Both companies had similar corporate philosophies and product portfolios – these had resulted in fierce competition in the past but in the 1920s were precisely the reasons which made a merger feasible in the first place. Several approaches in this direction had already been made. In 1916, DMG was given the opportunity to buy a major block of Benz shares from a third party – a deal endorsed by the Board of Management but vetoed by the Supervisory Board. Another initiative was taken in 1919 when Benz & Cie. suggested a pooling of interests – a first concrete step towards a merger at a later stage. Again, the Supervisory Board of DMG thwarted these plans.
Negotiations were resumed after the death of the chairman of DMG’s Supervisory Board, Dr. Alfred von Kaulla, in mid-January 1924. Dr. Carl Jahr, member of Benz’s Supervisory Board, submitted a memorandum on the merger of the two companies in early February, arguing that a pooling of interests would go a long way towards securing international competitiveness, that synergy effects would lead to price reductions, and that extensive rationalization effects could be achieved in all operations. A pooling of interests was far from being an unusual cooperation scheme in those days. Daimler and Benz signed the relevant contracts in early May 1924, empowering the new executive management panel to initiate far-reaching changes in corporate structures and placing it under the obligation to engage in a joint product policy.
To streamline production, its was proposed that each plant should produce just one type of vehicle in the future: Mannheim the two-liter passenger cars, Untertürkheim the four-liter and six-liter models, Gaggenau trucks below four tons and Berlin-Marienfelde those above four tons. The design departments were to be pooled, and bodywork production was to be centralized in Sindelfingen.
In one of the first steps, the sales activities were restructured. In late May 1924, a joint sales organization – Mercedes-Benz Automobil GmbH – was founded.It goes without saying that there were not only supporters of the co-operative venture – but those against it were unable to prevail. A little over a year after the pooling of interests, the next step was taken when an application to initiate the merger was submitted on June 12, 1925.
The merger contract became effective on June 28/29, 1926. A new trademark was subsequently designed, with the laurel wreath of Benz & Cie. and the “Mercedes-Benz” logo framing the three-pointed star of Daimler-Motoren-Gesellschaft. An illustrious new brand had thus been created which has lost nothing of its aura to this day.
Since the depression continued until mid-1926, the plan to produce just one type of vehicle in each plant was doomed to failure. Those in power decided to produce three basic passenger car models, with the most popular model being manufactured in Mannheim. The idea was to change from group manufacture to assembly line production step by step, as well as to cut production costs and to accelerate manufacturing processes. The service and sales networks were streamlined. In the course of 1926, two new passenger car models with six-cylinder engines were developed – a two-liter car to be produced in Untertürkheim and a three-liter model to be produced in Mannheim. These cars were presented to the public in the fall of 1926, as the first joint Daimler-Benz range of cars.
Daimler-Benz AG broached the issue of the merger in different advertisements. A poster from 1926 had this to say, for instance: “The two oldest and largest motor manufacturers in Germany have joined forces with the aim of offering customers all over the world passenger cars and commercial vehicles in unsurpassed quality and at attractive prices, based on more than 40 years of experience in automotive engineering, joint purchasing of raw and production materials and a generously laid-out field organization.” The company went on to achieve just that in formidable fashion in subsequent years, succeeding by and large in reaching its rationalization and streamlining goals. The merger had come off highly successfully.
A new chapter in corporate history was opened in 1998 when Daimler-Benz AG and Chrysler Corporation merged into DaimlerChrys-ler AG for reasons quite similar to those in 1926 – the greatest merger of two industrial companies to date. But that is a different, though no less exciting, story.
For more detailed information about the merger of Daimler-Motoren-Gesellschaft and Benz & Cie. please click here.

Media

  • 793523
    Dr. Emil Georg von Stauß
  • 793524
    Dr. Carl Jahr
  • 793525
    Wilhelm Kissel
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