/ 21 May 2007

Schrempp goes to the dogs

"Isn't this a glorious day!" declared Jürgen Schrempp in Stuttgart on October 26 1998, according to a Business Week reporter. Schrempp, then chief executive of Daimler-Benz, had good reason for his exuberance. He had just engineered the biggest industrial merger in history -- between his company, Daimler, and American giant Chrysler.

“Isn’t this a glorious day!” declared Jürgen Schrempp in Stuttgart on October 26 1998, according to a Business Week reporter.

Schrempp, then chief executive of Daimler-Benz, had good reason for his exuberance. He had just engineered the biggest industrial merger in history — between his company, Daimler, and American giant Chrysler. Although the merger was an all-paper deal, analysts have estimated it valued Chrysler at $36-billion.

Less than 10 years later, it’s all going to the dog … the three-headed dog who guards the gates of Hell, from which private equity company Cerberus takes its name.

Cerberus will pay just $7,4-billion to buy the company — $29-billion less than Schremp paid for it.

But DaimlerChrysler chief executive Dieter Zetsche will be hoping that, for his company, the horror movie is coming to an end.

For Schrempp, 1998 marked the high point of a career that quickly descended into controversy and he became the man investors loved to hate. Schrempp started his career at Daimler-Benz as an auto mechanic, but managed to complete a degree in engineering and head the world’s seventh-largest company.

His first international stint came when he was posted to Mercedes-Benz in South Africa, where he was appointed a board member in 1980. After a two-year stint in the United States, he became president of Daimler-Benz South Africa from 1985 to 1987.

Despite a two-decade absence, he still retains his South African ties. He is a director of Sasol and is also a member of President Thabo Mbeki’s International Advisory Council.

But as Daimler-Benz chairman, he led the company from one disastrous deal into another.

When he headed up the company’s aerospace division, he bought troubled Dutch aircraft manufacturer Fokker, in 1992. A year after he was appointed chairman in 1995, the company stopped subsidising Fokker, which promptly went bankrupt. In 2003, he was rebuked by his own board for a plan to inject more capital into struggling Mitsubishi Motors, of which DaimlerChrysler owned 37%, according to Fortune. In 2005, he stepped down in favour of Zetsche.

These days, Zetsche would probably be hard-pressed to remark on the gloriousness of the weather. He may, however, have felt more than a flicker of relief as he announced that 80,1% of Chrysler would be sold off to private equity company Cerberus.

The new owner will pay $7,4-billion for its stake, but DaimlerChrysler will receive only $1-billion. The bulk of the money will be used to strengthen Chrysler’s finance arm. At just a fifth of the money Daimler-Benz paid nine years ago, the deal underlies just how desperate Zetsche was to get rid of the loss-making business.

Cerberus is named for Hell’s guard dog, who, according to legend, was repeatedly outwitted by Greek heroes.

Perhaps wisely, Zetsche and his American counterparts have refrained from commenting on the symbolism of the name.

DaimlerChrysler will revert to Daimler, and will also keep the Mercedes-Benz, Smart and Maybach brands.

Zetsche said the remaining business was in a strong financial position.

“We have a well-defined road map to lead us to the future.” He indicated that the deal would make his group a less attractive target for potential predators than before.

The marriage brought together a German manufacturer whose Mercedes-Benz brand was synonymous with high quality, and an American carmaker whose Dodge and Jeep marques had helped it capture a quarter of the US market.

The “merger of equals” was meant to strengthen the pair against more efficient Japanese rivals, protect themselves from market overcapacity, and help them address the environmental concerns that threatened the whole automotive industry.

Right from the start, there were problems. Although Daimler implemented a rigorous post-merger programme of meetings and seminars in an attempt to bring the two halves of the company together, former employees have spoken of cultural clashes.

A key issue was Daimler’s pride in Mercedes-Benz. Chrysler’s staff resented the perception that their products were inferior, with some Mercedes-Benz dealers reluctant to even offer Dodge and Jeep vehicles.

Meanwhile, hopes that the merger would deliver significant synergies were not helped by Mercedes’s reluctance to trust the factory line and quality control systems used by Chrysler.

While it was called a merger, the truth was that Daimler had pulled off a takeover. Bob Eaton, Chrysler chief executive, became joint-CEO alongside Schrempp, but the pair reportedly spoke infrequently.

Some commentators have suggested that Schrempp was reluctant to interfere with Stateside operations, others that Eaton rapidly became detached from a company that he had once led dynamically.

What’s clear is that by the time Eaton departed in March 2000, many key Chrysler executives had beaten him to the door, apparently frustrated by life in the new company. This did not leave it in particularly robust shape for the difficult conditions it was about to face.

Shortly after, Schrempp gave the game away in an interview, telling a German newspaper that Chrysler was always meant to be a mere subsidiary of Daimler.

By 2001, the value of the combined company had dropped to roughly that of Daimler-Benz before the merger. Chrysler’s US market share had dropped to 14%.

Its failure to adjust to the growing demand for smaller, more efficient cars, rather than sports utility vehicles and pickup trucks, left it badly exposed as the US economy slumped.

This was also the year when the losses began.

From a profit of â,¬531-million the previous year, Chrysler lost â,¬2,2-billion in 2001.

In 2002, the company recovered with an operating profit of â,¬1,32-billion, but lost â,¬506-million in 2003 as restructuring costs began to bite.

It bounced back in 2004 with a profit of â,¬1,4-billion, partly due to price cuts. And in 2005 it grew its operating profit to â,¬1,5-billion, but then posted a loss of â,¬1,118-billion in 2006.

Schrempp retired early at the end of 2005, having faced the wrath of shareholders who believed he had paid far too much for its US rival.

His successor, Zetsche, admitted earlier this year that a break-up was imminent. Announcing 13000 job cuts, he said all options were under consideration in his efforts to find “the best solution for both Chrysler Group and DaimlerChrysler”.