Term Paper on "Daimler Divestiture of Chrysler"

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Daimler-Chrysler Financial Debacle

In The Merger And Dissolution Of Daimler-Benz And Chrysler

History of the Participants: Differences and Similarities

Daimler-Benz

Chrysler History

Prior to the Merger Discussions

Daimler-Benz becoming a global conglomerate

Chrysler's growth and success in the 1990s

First error: from-the-top decisions

The early merger announcements: opportunities missed

Chrysler: What Eaton could have done better

Shortcomings on Daimler-Benz's side

HISTORY of the PARTICIPANTS: DIFFERENCES and SIMILARITIES

DAIMLER-BENZ

If you travel to Stuttgart, you'll find the three-pointed star everywhere, from the main train station to the engine works in Unterturkheim on the Neckar River. Long the largest employer in the Stuttgart region, Daimler-Benz was started by two brothers in 1886 to produce independent, gasoline-engined vehicles in small numbers. From the very beginning, the Daimler brothers created new technologies, such as planetary gearboxes, which advanced the overall auto industry, and were adopted by many of the major automobile manufacturers. As early as 1903, Daimler-Benz produced a lightweight, 35-hp car which could travel 55 miles per hour, which gave rise to an early participation in auto racing (Cyber, 2007). Merged in 1921, Daimler-Benz continued to be a small manufacturer with high technology and excellent engineering: in 1927, DB sold fewer than 8,000 automobiles. The 1928 introd

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uction of the Mercedes SS introduced the mark to the entire world of the wealthy: models of the SS and SSK of the 1930s now sell for millions of dollars, and are among the most valuable collectible automobiles of all time.

Mercedes' preeminence in automobile technology allowed it to emerge after World War II as a fully-integrated automobile and truck manufacturer and one of the leaders in Germany's post-war "Wirtschaftswunder," or economic miracle.

Unlike BMW, Audi and Volkswagen, Daimler-Benz positioned itself as a luxury brand, known for high-end engineering, quality and durability. DB cars were sold in Germany on a waiting-list basis -- Germans would frequently order their next car when taking delivery on their current one, with waiting lists of as much as two years. Rather than increase production, Daimler maintained an air of exclusivity through controlling demand and insisting that their cars meet stringent quality standards before leaving the factory

Daimler-Benz was the premier producer of high-end autos without parallel, as BMW was a niche player with smaller autos and Audi was rescued from bankruptcy by Volkswagen in the 1960s. Daimler used its image as a high-end manufacturer to power its exports throughout the world. Even before the 1999 merger, Daimler-Benz was the largest company in Germany, based on sales and market capitalization (MercedesBenzUSA, 2007).

CHRYSLER HISTORY

As at Daimler-Benz, Chrysler was founded by an engineer. Walter P. Chrysler was a penultimate engineer who introduced a number of innovations in the U.S. automobile scene. Chrysler was a railroad engineer who made a name at General Motors in the early days by rescuing the Buick Division. He took over Maxwell and purchased the Dodge Brothers' company in 1925 in order to form the Chrysler Corporation.

Unlike Daimler-Benz, Chrysler was a scrappy upstart in a U.S. auto industry where the two giants, General Motors and Ford, dominated the U.S. auto market based on model niche coverage (GM) and low-cost mass automobiles (Ford).

Chrysler's first moves in 1925 were to phase out the Maxwell and create the first Chryslers, based on new four-cylinder technology. Over the next ten years, Chrysler introduced the first automatic transmission, an innovative straight-eight engine and a number of engine and drive train innovations that cemented Chrysler, the "third leg" of the "Big 3" as the engineer's automobile.

According to Redgap:

Engineering held sway at Chrysler at the time. Walter P. Chrysler had gotten his start with a car that was designed and built by three engineers who had been working for Studebaker. Fred Zeder, O.R. Skelton, and Carl Breer made it possible for Walter Chrysler to be able to introduce the first true high compression in line 6 cylinder flathead engine in his 1924 Chrysler car. They also saw to it that the Chrysler had the new Lockheed hydraulic brakes on all four wheels (Redgap, 2004).

During World War II, Chrysler was known for its innovative engines, including a massive 30-cylinder tank engine and a 2,500 horsepower engine for the P-47 Thunderbolt. Unlike Daimler-Benz, Chrysler was not destroyed during World War II. Its manufacturing lines were converted to production of war materiel, and Chrysler emerged a strong competitor after the war. Unlike today, the U.S. auto manufacturing sector had a number of competitors with significant market share after the War, including Packard, Studebaker and Hudson. Although Ford and GM's future was secure, Chrysler was forced to fight with a number of other brands for its #3 position. The company continued its engineering leadership with the Torqueflite automatic transmission and the 1955 introduction of the Hemi (hemispherical combustion chambers) in the iconic C-300, which introduced the first 300 horsepower V-8 for a passenger vehicle (Redgap, 2004).

Unlike Daimler-Benz, Chrysler underwent a brush with near-bankruptcy. Chrysler Motors had drifted since the 1960's, the victim of imports' gains in the low- to medium-priced segments where Chrysler had been dominant. It had lost market share, and been relegated to price-sensitive parts of the market where it lost money for a number of years, despite its high-volume manufacturing plants. After several years of losses, Lee Iacocca, a former Ford manager, was brought in to 'save' Chrysler after the then-CEO, John Riccardo, admitted that the company was in dire straits. Chrysler at that time owed $4 billion in debt, and had lost $207 million in the second quarter of 1979 alone (Anastakis, 2007), and $1.2 billion for the year. Lee Iacocca went to Congress to secure a loan guaranty for $1.5 billion, which was matched by further private risk of $1.5 billion.

Iacocca brought back Chrysler in the same way that he pioneered the Mustang at Ford, through marketing. Taking the K-class platform, Iacocca turned it into an array of products from a Mercedes-Benz lookalike (the 600) to a minivan. By 1983, Chrysler famously paid off its federally-backed loans, 7 years ahead of schedule. Iacocca then brought in a series of "car guys," and reformed the doddering company by introducing market-led designs in the car, truck and minivan sectors. He and his successors worked to reduce design-to-introduction time, breaking down barriers and matching the Japanese with a total design cycle of less than 3 years by the mid-1990s.

PRIOR to the MERGER DISCUSSIONS

DAIMLER-BENZ BECOMING a GLOBAL CONGLOMERATE

Prior to Schrempp attaining the helm of Daimler-Benz, the company was headed by Edzard Reutter, a Berliner with political and global pretensions. He had led DB's diversification from auto, truck and bus manufacturing to a bewildering array of transportation- and data-based acquisitions. Based on strong continuing cash flow from the car business, Reutter acquired major stakes in aircraft industries, including a dominant share in DASA, the German participant in Airbus, aircraft engines (MTU) and even data and finance (debis). Reutter redefined Daimler-Benz from 'vehicle manufacturer' to an 'integrated technology group,' increasing investment in HQ R&D as well as acquiring a number of R&D-based organizations -- at DB they were called 'R&T,' or 'Research and Technology.' Like Chrysler in its history, DB regarded engineering as the source of its competitive strength. Unlike Chrysler at the time of the mid-1990s, DB felt that it could apply industrial engineering expertise among a large number of unrelated enterprises (Ngassa, 2000).

The predictable result of this conglomerate-chasing was that (1) DB's financial results begun to deteriorate during the 1990s as corporate spending grew out of hand, and (2) DB began to falter in its core auto "Modellpolitik," or model flow in comparison with its key competitors, Audi and BMW. What concerned many employees and DB watchers was that Mercedes' once-vaunted quality was beginning to slip.

Enter Jurgen Schrempp in 1995. The hyperactive manager came to the Chairman position from DASA, which was Daimler-Benz' aircraft division in Munich. He was hailed as "a doer, not a thinker. A power player, not a philosopher (Economist, 1995)." He was hailed as the opposite of Reutter, who was regarded as a big spender and not able to get his hands dirty in the operational details. Schrempp had come from successful stints running DB's car manufacturing in South Africa and managing DASA, which was the largest division outside of vehicle manufacturing. Schrempp was regarded in 1995 as active, operational and willing to make the tough decisions needed to merge, demerge and consolidate Reutter's previous mistakes.

Schrempp brought a new world view to DB's helm. Rather than reinforce DB's stance as the largest German company, Schrempp worried about DB being relegated to the sidelines, pushed out of the top 10 automakers in the world as Volkswagen, the Japanese and Ford and GM moved from acquisition to acquisition. Although he was able to stop the losses and sell off non-core divisions, Schrempp was looking for a move that would both propel DB to the top ranks of the global automobile industry and identify him as a builder, not a destroyer. His early move… READ MORE

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Quoted Instructions for "Daimler Divestiture of Chrysler" Assignment:

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THE PART I AM SUBMITTING IS ONLY a portion OF THE PAPER. I WILL GO OVER IT WHEN I RECIEVE IT AND MAKE IT CORRESPOND WITH THE PORTION I AM DOING. THANKS. HERE IS THE INFO:

DAIMLER DIVESTITURE OF CHRYSLER

Field: Corporate Finance

Pillar: Globalization

490 Seminar in Finance

Guidelines for Completing the Paper

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Tristan van Gendt (201)741-4280 Daimlers divestiture of Chrysler

THIS IS THE 'OKAYED' OUTLINE WITH WEIGHTS

FIELD: CORPORATE FINANCE PILLAR: GLOBALIZATION

This is your portion. The intro and conclusion stuff are in my part. I'll put the two together when I recieve yours. thanks.

3-4pgs 15% III. Auto Industry

A. Major Players

1. Market share of each

B. Daimler

1. Who they are (pre-merger)

2. Brief History

3. Issues

a. Globalization

b. Off shoring

c. Cost of labor

C. Chrysler

1. Who they are (pre-merger)

2. Brief History

3-4pgs 20% IV. Creation of DaimlerChrysler

A. Foresight of merger

1. Globalization

2. Increased Asset Value

3. Increased ROI

4. Increased Shareholder return

5-6pgs 30% V. Divestiture of the two

A. Reasons Leading up to Divestiture

1. Graph of stock price

2. S&P 500 comparison

3. Industry comparison

B. Divestiture

1. Announcement

2. Mechanics and future owners

a. Cerberus Capital Management

b. Stephen Feinberg

3. Finalization

PROFESSOR 'OKAYED' REFERENCES. ALL/SOME CAN BE USED. ANY OTHER REFERENCES MUST COME FROM AN ACCREDITED FINACIAL SOURCE

WALL STREET JOURNAL, BUSINESSWEEK, NYTIMES, FINANCIAL TIMES, THE ECONOMIST, CNN MONEY. INFO ON HISTORY, MERGERS, DIVISTITURES CAN COME FROM ANY SEMI-ACCREDITTED SOURCE. CHARTS AND FIGURES-YAHOO FINANCE, CNBC.COM, REUTERS.COM, BIGCHARTS.COM. NO MIN OR MAX NUMBER OF CHARTS AND GRAPHS REQUIRED.

BELOW IS A COPY OF POWER POINT SLIDES I USED AS A PRESENTATION. USE WHAT YOU NEED AS A REFERENCE.

DAIMLER DIVESTITURE OF CHRYSLER

Field: Corporate Finance

Pillar: Globalization

Presented by:

Tristan van Gendt

TO BE COVERED

Summary of topic

Daimler-Benz/Chrysler histories

Overview divestitures

Merger of Daimler-Benz & Chrysler

Dark days at Daimler-Chrysler

Leading up to divestiture

Sale of Chrysler

Conclusion

SUMMARY

On November 12, 1998 Daimler-Benz and Chrysler became one. Known as Daimler-Chrysler, the trans-Atlantic pair became the 4th largest in the auto industry. Unfortunately, after years of misfortune together, Daimler announced the sale of their Chrysler division. It was purchased by Cerberus Capital Management on May 14, 2007 and the individual companies are now known as Daimler AG and Chrysler LLC.

HISTORY

Daimler-Benz

Formed on June 28, 1926

Merger of DMG and Benz & Cie.

Necessity for survival after WWI

Three pointed star: land, water, and air

Flagship brand: Mercedes-Benz

To left: 1929 Model S Tourer

HISTORY

Daimler-Benz (cont*****d)

Public company

Traded on NYSE, TYO. Both under DAI

Based in Stuttgart, Germany

Current Chairman: Dieter Zetsche

Produce auto and truck

Mercedes-Benz, Mercedes-AMG, Maybach, Smart, Western Star, Freightliner, Orion Bus, and many more

270,000 employees

HISTORY

Chrysler

Created in 1925 by Walter P. Chrysler

Purchased Maxwell Motor Corporation

Acquired Dodge, DeSoto, and Plymouth in 1928

Known for engineering advancements

First mobile and stationary HVAC systems

Alternators replaced generators

Introduction of 180 HP V8 HEMI in 1951

History

Chrysler (cont*****d)

Purchased AMC in late 1980*****s

Included JEEP brand

Private company

Based in Auburn Hills, MI

CEO: Robert Nardelli

Produce auto*****s, light trucks, vans

Over 130,000 employees

Divisions: Chrysler, Dodge, ENVI, Jeep, Mopar, Chrysler Financial

OVERVIEW

Divestitures

Sale, spin-off or closure of an asset by a company

Asset is unrelated, unprofitable, unmanageable

Taking away from the core business

Most common reason for divestment: Financial

Companies worth more as separate entities

MV(AB) < MV(A) + MV(B)

Return focus to activities that give a competitive advantage

MERGER

Daimler-Benz & Chrysler

Announced on May 7, 1998; Completed on Nov. 12, 1998

Biggest cross-boarder deal of the time

$36 billion takeover of Chrysler by Daimler-Benz

Pre-merger stock prices: Chrysler $48, Daimler-Benz $108

Reasons for merger:

Immediate access to N. American mass market- the worlds largest market

Increased production capacity

Increased knowledge on quick decision making and prompt intro of new vehicles

MERGER

Daimler-Benz & Chrysler (cont*****d)

Reason (cont*****d):

Ability to introduce middle class sedans

Greater economy of scale

Cost Savings of $1.4 & $3 billion in the first and first few years, respectively

Expected $130 billion in annual revenue

Daimler-Chrysler

Dark Days

Introduction of minivans and SUV's from Japanese producers

2001- stock trading at half its peak in 1999

2001- operating earnings fell 49% to $4.9billion

2003- $1 billion 2nd quarter loss at Chrysler eats up five quarters of combined earnings

High costs, aging line-up, and no market buzz

Daimler-Chrysler

Dark Days

Big losses in market share: 13.5% in 2006 compared to 17% in 1998

Gas prices hover around $3 a gallon

Lose SUV and large car sales

Increased foreign competition

2003 *****“ Chrysler management overwhelmed with issues suc as unpopular models, inefficient factories, weak image

Continued broken promises by then CEO Jurgen E. Shrempp

2003 & 2005 *****“ DaimlerChrysler market cap falls to $38 billion compared to Daimler-Benz*****s $47 billion pre-merger

Chrysler Group Chief Executive Dieter Zetsche promises profits by demanding concessions from unions and scrapping plans to build new plant in Canada.

Daimler-Chrysler

Dark Days

2005 - MB quality sacrificed

Dropped to bottom of J.D. Power & Assoc reliability survey

Lost buyer confidence and sales

$600 million in warranty costs

July 28, 2005 Deutsche Bank sells down its 10.4% stake to 6.9%

DB sells remaining stake before years end

Daimler-Chrysler

Dark Days (1/99-12/06)

Leading Up

to Divestiture

Daimler continued attempts to save Chrysler

1/06 - Dieter Zetsche replaces Jurgen E. Schrempp as CEO

1/06 - Announcement of 6,000 white collar jobs cut. 30% from management level

Would save $1.8 billion by end of 2008

7/06 *****“ Chrysler profit only $65 million compared to $695 million one year earlier

Due to having the highest inventory of unsold vehicles in the industry paired with raising interest rates

Lost sales in SUV, large truck and minivan segments because of high gas prices

2006 - $1.5 billion 3rd quarter loss

10% decrease in sale for the first half of 2006

Did not slow production quick enough, could not reduce high inventories

Analysts start suggesting a spin-off of Chrysler

Inventory turnover reached 100 days. 1/3 more than the industry average

Cost of materials increased by as much as 60%

Dec. 2006: 20% -30% of *****06***** models still held (industry average: 10%)

Leading Up

to Divestiture

Leading Up

to Divestiture

2006 *****“ End of year production cut by 16%

705,000 cars and trucks to be produced

Highest medical costs of the Big Three

UAW president not willing to cut costs

DaimlerChrysler hoped to save $340 million/$600 per car

Sale of Chrysler

February 14, 2007: *****No option is being excluded.***** Stated by DaimlerChrysler*****s advisory board

April 05, 2007: Talks with potential buyers of Chrysler take place.

3 Preliminary offers are made-Blackstone Group, Cerberus Capital Management, and Magna International

Analysts estimate a sale in the $5-$7 billion range

Hilmar Kopper departs from advisory board

Former chief of Deutsche Bank and supporter of merger

Risk increases on both sides of the pond

Americans face possibility of a fire sale

If purchased by a private equity firm, massive layoffs could take place and the remainder sold for a profit.

Germans vulnerable to corporate takeover

Sale of Chrysler

A buyer is chosen

In May 2007 Cerberus Capital Management agrees to acquire an 80% stake at $7.4 billion for the Chrysler brand

$5 billion will go toward Chrysler auto operations

$1 billion toward finance arm

$1.4 billion directly to Daimler.

Daimler must cover another $1.6 billion in losses before end of deal therefore paying out $650 million to finish the deal.

Daimler also estimates a $4 - $5.4 billion dollar profit hit due to other related charges

Daimler

The Road Ahead

Freedom from unpredictable sales, ongoing losses, health care costs, and retiree benefits. All adding up to the $18 billion range.

30% stock price increase in three months since announcement.

Retains 20% stake in Chrysler Holdings.

2007 2nd quarter Mercedes profit double- $1.65 billion

Daimler

The Road Ahead

Operating margins predicted to go to 10%

Look to overtake BMW *****“ 7% to 8% Operating margin

Now known as Daimler AG.

Much opposition from Karl Benz supporters

Paid final costs of $3.4 billion to complete sale.

Down from the estimated $5.4 billion.

Profits down 14% to $2.5 billion due to Chrysler final losses.

Plan stock buyback to strengthen earnings and cash flow

*****underlines our trust in the future of the *****˜new Daimler***** and all its divisions.***** CEO Dieter Zetsche

Purchase of $5.2 billion of treasury share by end of 2007

Purchase of additional $5.9 billion of treasury shares by end of 2008

Big increase in share price since announcement. Feb. 14th *****“ about $69. Week after sale - $110. Current - $100

Daimler

The Road Ahead

Chrysler Holdings

The Road Ahead

Off to a rough start.

$10 billion debt carried by 5 banks, led by JPMorgan Chase.

Investors unwilling to accept terms. Deterred by collapse of home mortgage market.

Banks agree to take on debt and sell it at a later date.

Need to find investors to help fund trust to take over health care liabilities. Could reach $70 billion.

Chrysler Holdings

The Road Ahead

Friday August 3, 2007 *****“ Cerberus Capital Management takes control of Chrysler Group. Robert Nardelli named chief executive. Former Home Depot CEO and top executive at GE.

Restructuring includes cutting 13,000 positions in the U.S. and Canada by 2009

Return to pentastar logo.

Ground breaking of two new plants in *****on, Michigan for axels and fuel efficient engines. $700 million each.

LAST WORDS

Daimler AG: Analysts have recommend buying or holding DAI for the past 3 months.

Personal Opinion: Daimler will succeed with the burden of Chrysler off their hands. They will have the ability to focus on their flagship brand, Mercedes Benz. With the importance of bringing the value back into the company, they will make necessary changes to prove themselves to their shareholders and customers. This will be accomplished once they return their image back to pre-Chrysler. Hopefully, previous quality problems were really caused by their focus being turned toward Chrysler.

LAST WORDS

Chrysler Holdings: Now in the hands of a private equity company, Chrysler has the ability to cut costs and make changes more freely then it had before. While they still have to deal with some of the constraints of the UAW, they did receive the Chrysler brand at a discount giving them room to re-invest in other areas as well. In the next couple years we should see a re-inventing of the brand in the size of their cars, engines, and change of image. Also, with their new freedom, they will have a major advantage over GM and Ford and could possible re-join the top three in the U.S.

THE END!

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