Berlin: DaimlerChrysler AG ended a nine-year investment in money-losing Chrysler, handing control of the carmaker to private-equity firm Cerberus Capital Management LP and getting out from under $19 billion of retirement benefits.
Cerberus will put up $7.4 billion with most of the money invested in Chrysler, while DaimlerChrysler will pay out a net amount of $650 million, the Stuttgart, Germany-based company said on 14 May in a statement. The agreement gives Cerberus 80.1% of Chrysler, while the Germans, who paid $36 billion for the automaker in 1998, will retain 19.9%.
Chrysler lost $680 million last year and ceded market share to Toyota Motor Corp. while relying too much on the stagnant North American market. DaimlerChrysler Chief Executive Officer Dieter Zetsche failed to keep the US carmaker profitable after completing a reorganization he began as head of the business.
“The sad and unfortunate reality for the DaimlerChrysler shareholder is how much value destruction there has been over the years,” said James Bevan, who helps manage about $9 billion as chief investment officer at CCLA Investment Management Ltd.
Shares of DaimlerChrysler rose as much as 4.73 euros, or 7.8%, the biggest gain since former CEO Juergen Schrempp announced his departure in July 2005, to 65.34 euros and were up 6.5% at 10:47 a.m. in Frankfurt. The stock has surged 31% since 13 February, the day before Zetsche said “all options” were on the table for Chrysler’s future.
“We’re confident that we’ve found the solution that will create the greatest overall value, both for Daimler and Chrysler,” said Zetsche in the statement. The company will change its name to Daimler AG.
Of New York-based Cerberus’s total contribution, $5 billion will flow into the industrial business of Chrysler, $1.05 billion into Chrysler’s financial services business, while Daimler gets the balance. Daimler will end up paying $650 million in the transaction, including granting a loan of $400 million to Chrysler. Existing projects with Mercedes will be continued and a joint council, consisting of management board representatives, will be formed to discuss business projects.
“The amount Daimler is having to pay is much less than feared,” said Juergen Meyer, who manages about 1.3 billion euros at SEB Asset Management in Frankfurt. “It’s very important to look at the cash flow.”
United Auto Workers President Ron Gettelfinger said in the statement he supports the deal, terming the takeover “in the best interests of our UAW members, the Chrysler Group and Daimler”. Pension and health care costs associated with Chrysler will be taken over by the new company.
“The decisive detail is the fact that health care and pension obligations remain at Chrysler,” said Uwe Treckmann, Equity Strategist at Dresdner Bank in Frankfurt.
Chrysler sells fewer cars in the US than General Motors Corp., Ford Motor Co. and Toyota, making it the fourth-largest US carmaker. Daimler-Benz AG bought Chrysler Corp. in 1998 for $36 billion in what it billed as a “merger of equals”.
Chrysler since 1998 has posted annual profits of as much as $5 billion and losses almost as large, increasingly becoming the target of investors’ ire. Its latest crisis marked a third descent into losses since Lee Iacocca saved the automaker from bankruptcy 25 years ago.
Chrysler Corp. was created in crisis. It was formed in 1925 by former GM executive Walter Chrysler, who five years earlier had taken over Maxwell Motor Co. at the request of creditors and restored profit. He had been tapped to rescue Maxwell after leaving GM in a dispute with Chairman William Durant.
Early on, Chrysler was the 27th-largest car company in the US. By 1929, it had cemented its position as third biggest, behind GM and Ford Motor Co.
For the past three decades, Chrysler has veered from crisis to success, with periodic boardroom drama. The automaker almost went bankrupt in 1980, after fuel shortages and rising gasoline prices choked sales of its big, rear-wheel-drive cars.
President Jimmy Carter signed a $1.5 billion federal loan guarantee to keep the company afloat. Iacocca, who joined Chrysler as chairman after being fired at Ford by Henry Ford II, became a national celebrity with his advertising challenge: “If you can find a better car, buy it.”
Cerberus may have established itself as the front-runner by hiring former Chrysler Chief Operating Officer Wolfgang Bernhard as an adviser, Canadian Auto Workers union President Buzz Hargrove said on 13 May. Bernhard, who left in 2004 after four years as COO, has a strong personal relationship with Zetsche, Hargrove said.