I was recently reflecting on Kirk Kerkorian’s suit against DaimlerChrysler. Overlooking the interesting (and inconsistently reported) admission that, while he was a 14% shareholder and director, he never actually read the merger document, I’m more surprised by the underlying claim. The basis of the suit is that he was hoodwinked out of his takeover premium in the 1998 “merger of equals” between Daimler and Chrysler. What shocks me is that he believes there is such a thing as a merger of equals!

Think about the elements of what makes equality in company ownership and governance and it’s easy to see why a merger of equals does not and cannot exist.

Stockholders: There are two ways to think about stockholder equality in a merger situation, one is equality of value and the other is equality of valuation. It is possible to imagine, though unlikely in reality, that two companies could have exactly the same value and therefore post merger, two equal ownership camps, but in the real world of publicly held companies and large institutional owners, companies almost always have overlap in their shareholder bases. Even if for a moment in time they did not, with the liquidity in today’s market, this tender equilibrium, if it means anything at all, would be gone as soon as the market opens. By the way, in this case, the exchange ratio was based on asset values; while the market value of Daimler-Benz one day before the public announcement of the Daimler/Chrysler merger agreement was $58.1 billion and the market value of Chrysler on the same day was $26.8 billion.

Equality of valuation is both more concrete and more ephemeral, and forms the basis for Mr. Kerkorian’s claim. When two public companies agree to equality of valuation, they agreeing that the market has valued both of them precisely accurately and that no takeover premium needs to be paid. Given natural volatility in daily (or even ten day rolling average) stock prices, especially in the information leaky 1990’s, it seems obvious that an agreement to accept market values is not an agreement that the market has valued each company with perfect efficiency, but rather an agreement to use a market-driven number to get the deal done. Again, just to get the facts on the table Chrysler shares increased in price by 31% in the few weeks following the announcement of the merger, while the Daimler share prices lost about 8% of value.

Directors: Let’s look at the next level of corporate governance. Here it is easier to imagine an equal division of the board of directors between Daimler and Chrysler, and that is precisely what the post merger board looked like. The real question is - would you do this to intentionally set up a stalemate on your board? And even if this was your intention, how can directors ignore their fiduciary duty to all stockholders? I think the real answer is that once the deal is completed, for the most part, the board members put away their heritage and focus on getting their job done.

Management: No matter what words the parties use to describe the deal, when it comes to day-to-day
management and the selection of the senior management team, the CEO’s office is where the power lies in any company and in any acquisition. There is one universal truth in every deal I’ve seen – someone has to be in charge! And the CEO chooses his or her team. Here, the original post merger structure was co-CEOs, an unworkable structure if ever I saw one. Who knows what went on behind the scenes, but Robert Eaton, Chrysler’s ex-CEO retired a few months after the deal closed. Within two years, nearly all ex-Chrysler senior management and directors had resigned or retired. Sure, everyone makes an effort to choose the best person for the job, regardless of former company affiliation, and anyone will tell you that a successful acquisition requires melding of leadership. But when the rubber meets the road, nearly every time, a CEO will go with the executive that they have worked with and know. This isn’t just loyalty repaying loyalty (though there is some of that), it’s just more efficient to work with the people you know.

In fact, a long time Daimler executive was put in charge of Chrysler and over the past few years has cut costs and introduced several new models. In a strange irony, this long-time Daimler executive is set to return to Stuttgart and turn over Chrysler to a new division COO who has only been on the scene since 2000, when he joined Chrysler after a long career at General Motors.

David Wolf is a Managing Director of The Mercator Group, a Boston-based management-consulting firm that offers business advisory, interim management and M&A services to emerging and middle market companies.  Email dwolf@mgboston.com to contact David.