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4 August

How Daimler, Chrysler Merger Failed

G0erman car maker Daimler-Benz and the American car manufacturer Chrysler Group merged in 1998 for a $ 36 billion to express. Now, Daimler sold its U.S. luxury brand for just $ 7.4 billion. What went horribly wrong?

Automotive records reflect that the majority of failures in the industry involved individual vehicles. But at the moment a malfunction of more intense because it is a size defined by a company not only the car, was shocked by the industry. The news came as a bomb in particular for the employees of the ailing U.S. auto maker. Even the Pacific cold air could not escape the heat of the matter.

The nine year mergence giants of the car to a halt by Cerberus Capital Management the acquisition of a 80.1 percent stake in Chrysler. The New York-based private equity firm promised Monday to restore Chrysler "on the first ranks of American and global automotive industry."

Daimler takes 19.9 percent stake and find synergies that have not yet occurred. "We obviously overestimated the potential synergies," Dieter Zetsche, chief executive of DaimlerChrysler, said at a press conference Monday at the headquarters in Stuttgart, Germany. "I do not know whether an amount of" due diligence "could have a better estimate in that regard."

The acquisition of Chrysler marks the first time that one of the Detroit Big Three automobile manufacturers will be in the hands of a private equity firm. As such, the fact is some of the interpretation and analysis. There are those who say that the merger, which faced significant cultural differences, was doomed from the start.

"You had two companies from different countries with different languages and different styles together, but there were no synergies. It was just an exercise in empire-building by Juergen Schrempp," said Dave Healy, analyst at Burnham Securities, referring to the then Daimler -Benz chairman, and the reason why the merger failed. "In principle, Daimler has now paid Cerberus to take Chrysler out of its hands," Healy added.

Originally, the plan for the use of Daimler Chrysler, parts and even vehicle architecture significantly reduce the cost of production of future vehicles. But problems arise when Daimler's Mercedes-Benz luxury division, whose components could use Chrysler was reluctant to contribute to Chrysler. Eventually, all Chrysler got were some steering and suspension components, a transmission and a diesel engine and a few packages.

In return, had hoped that Daimler Chrysler would drastically increase its position in the North American auto market. But as a result of strong competition from Asian car manufacturers, Chrysler fell short. Billed as a "merger of equals," the $ 36 billion deal turned out to be anything but, analysts said. Shortly, the control of the combined company declined to Daimler Chairman Schrempp.

"Eaton panic," Lee Iacocca, said. "We were at $ 1 billion per quarter and had $ 12 billion in cash, and while he said it was a merger of equals, he sold Chrysler to Daimler-Benz, when we should have bought." And Daimler was an all too willing, if unwitting, partner, analysts said. The company underestimated the competitive forces that would invade the North American car and take the market share of the domestic car manufacturers.

"Due diligence? Daimler-Benz never due diligence before it bought Chrysler, never looked into the future to see if Chrysler could afford to be competitive with others in the sector," stressed George Peterson, President of Global Insight.

Chrysler sales slipped, the German car maker shipment Zetsche to Detroit in 2000 to turn Chrysler around. Chrysler returned to profitability by the time he returned to the main Daimler in 2006, Zetsche said last Monday that the sale was a difficult task personally. "

With Zetsche at the helm, Chrysler reported a $ 1.8 billion euro profit in 2005. But like other Detroit car manufacturers, the company had the market. With a heavy use of trucks and SUV's, Skyrocket fuel quickly dampened sales and Chrysler profits rendered in a $ 1.47 billion last year, culminating with the announcement Monday.

"When Zetsche left Chrysler is President of Daimler Chrysler, should not be news to him that Chrysler was headed for trouble," says Peterson. "Sales Chrysler Group now takes him from the hook."

Most Cerberus' investment will not Daimler, but will be used to strengthen Chrysler operations. Slightly more than $ 1 billion is earmarked for the financial services activities. "Our approach is fundamentally long term. We do not think about the next quarter. Our capital is patience," said Cerberus Chairman John Snow. "We take a longer view. We are prepared to make investments to support management plans."

But analysts say that the pressure will be on the Auburn Hills, Michigan-based car maker to enter. "Cerberus" history is a 20 percent return on its investments annually. They will not deal with Chrysler as a certificate of deposit, "said Dave Cole, chairman of the Center for Automotive Research. And that could mean spin part of Chrysler operations." She could break Chrysler up and spin off some parts, such as the Jeep or mini-van operations. I would not say it, but they can, "said Peterson.

Zetsche noted that Cerberus is not bound to any changes in head count, other than the 13,000 workers the car maker said a shed in three years. "He says no head counts, but it is today. They still need to get $ 20 per hour in wages and benefits for their employees to be competitive," said Healy.

Cerberus' control over Chrysler is expected to be completed in the third quarter. Analysts said that the situation could open the door for the return of Wolfgang Bernhard at Chrysler. Though Cerberus said Tom LASORDA reserves as CEO, the private equity firm hired Bernhard, the position of Chief Financial Officer of Chrysler in 2004 as an adviser on the deal. Bernhard was recently head of Volkswagen AG.