When Germany’s Daimler Benz merged with the third of the United States’s big-three car makers, Chrysler, in 1998, the deal was designed to create an automotive powerhouse, capable of matching the international reach of General Motors and Ford and confronting the emerging challenge from Japan.
“This is the beginning of the number one transport company in the world,” Robert Eaton, the Chrysler executive who became co-chairperson of the combined entity, boasted eight years ago. Last week, as the group called in investment bankers to look at the options for the future of Chrysler, including a possible break-up, hubris had turned to humble pie.
Although the group refuses to confirm the appointment of investment bank JP Morgan, even the prospect that Daimler and Chrysler could divorce has sent Daimler’s shares to a six-year high and the overall Dax index close to a record 7 000 points. Investors considering the benefits of corporate divorce need look no further down the autobahn from Stuttgart than Munich.
In 2000, BMW called time on its troubled ownership of Britain’s Rover. Since then, it has scarcely looked back. Sales and profits have soared. The Bavarian auto-maker is expected to report record profits for 2006 of â,¬4-billion. And Chrysler, which makes 2,7-million vehicles a year, is Rover times seven.
The key question, though, is whether last week’s announcement really was an early warning that the for-sale signs were going up or whether it was a ploy to put pressure on the US trade union, the United Auto Workers.
The company is in talks with the union over the Chrysler pension fund deficit and its liabilities towards employees’ future healthcare costs. DaimlerChrysler refuses to put a figure on how much the two add up to until publication of the annual report but estimates suggest $45-billion to $50-billion.
Ford and General Motors have struck deals with the union to confront similar issues, but Chrysler has yet to do so. The group admits that if it could get a deal along the lines of those negotiated by GM and Ford it would save between $300-million and $400-million a year. The union may be calculating that DaimlerChrysler has deeper pockets than GM and Ford. If so, Stuttgart’s decision to parade potential alternatives may be aimed at encouraging second thoughts.
The motor industry rumour mill has already churned out a string of names of possible buyers. General Motors, itself in the middle of a painful recovery, Korea’s Hyundai and the two main French groups, Renault-Nissan and Peugeot-Citroen. Hard-headed private equity groups, who supposedly own 15% of Daimler, have been put into the frame. GM, with its position as global number one carmaker under threat from Toyota, might be tempted, but has plenty to keep management occupied. The head of the works council at Opel, its German arm, has few doubts about the impact of a deal, claiming the acquisition of Chrysler would be “an absolute disaster”.
German investors are, however, united in their belief that a stand-alone Daimler, with its resurgent Mercedes brand, would soar in value. The combined group is now quoted at around $73 a share but, on its own, Daimler would be worth up to $100, traders said, suggesting its return on capital would go back to the 15% pre-merger level on sales to 7%.
“We must make some strategic adjustments to build off our historic strengths, but not rely on them so much that we are put at a competitive disadvantage,” according to Chrysler president and CE, Tom LaSorda.
The snag for Chrysler is that Stuttgart may decide its historic strength is the Mercedes brand and the strategic adjustment is the disposal of the US business. — Â