Daimler in Discussions with Cerberus To Sell Remainder of Chrysler
By Chris Haak
09.25.2008
When Daimler (then called DaimlerChrysler) sold 81.1% of its stake in Chrysler to Cerberus Capital Management in mid-2007, it held onto the remaining 19.9% of Chrysler. At the time, Daimler made all kinds of noise about how they believed in Chrysler and wanted to hold onto about a fifth of the company to reap the rewards of its success, and so forth.
Subsequently, Daimler was forced to belly up to two massive write-downs in its Chrysler stake based on the decline in the book value of its investment in Chrysler, according to international accounting rules. The size of these write-downs, easily extrapolated (by multiplying them by five) led many industry analysts to speculate that Chrysler was losing huge amounts of money. These rumors caused tight-lipped Cerberus, as well as Chrysler, to release public statements concerning its cash position, operating cash flow, and operating profits – in spite of there being no statutory requirement for doing so. Even if the accounting rules that Daimler must abide by are different (more strict in this case) than US accounting rules, the fact remains that Chrysler is still an albatross on Daimler’s neck – albeit only 19.9% of an albatross relative to what it would otherwise have been). (A brief editorial note: I’m not here to say that Daimler didn’t have an awful lot – if not nearly everything – to do with the situation Chrysler finds itself in today. After all, Daimler did own Chrysler for nine years, and oversaw the approval and development of every model in Chrysler’s current portfolio.)
Spokespeople for both Daimler and Cerberus confirmed yesterday that the discussions were in progress. It’s unclear as to what price Daimler would ask for the remaining stake (would it be close to the downward-revised book value rather than based on the original selling price of $7.2 billion in 2007?) My guess is that it would be based more on the company’s current value, which then puts Cerberus in the ironic situation of being rewarded with a cheaper purchase price of the company whose health has deteriorated on its watch.
Also unclear is the motivation behind this likely sale. Daimler surely wants to get rid of the rest of Chrysler, but the negotiations have been portrayed in the automotive media as Cerberus approaching Daimler and asking to purchase the rest of Chrysler. If there is a sale, Cerberus will no longer be required to have any public disclosure of Chrysler’s financial position (because Cerberus and Chrysler are both private companies, while Daimler is, of course, publicly-trade), so analysts will no longer have any information about the company’s health provided by a third party, so that could be a possible motivation. If the sale goes through, however, both Cerberus and Chrysler will probably have some egg on their face; Daimler for getting far less for the remainder of the company than they did last year, saying nothing of the $35 billion they paid for Chrysler in 1998) – showing that they should have just sold the whole thing at once in 2007, and Cerberus for overseeing a fairly significant decline in the value of their investment after a year under its ownership.
Should a sale be completed, both companies confirmed that all industrial alliances between Daimler and Chrysler would continue in their current state. The companies cooperate in China, on the Dodge Sprinter (built in Germany, assembled in the US from knockdown kits), in the Hybrid Development Center joint venture with GM and BMW that spawned the Dodge Durango Hybrid and Chrysler Aspen Hybrid, and in some component sharing (such as the BlueTec diesel in the Grand Cherokee CRD, and the German-built five-speed automatic transmission found in the 300C and other LX vehicles).
No doubt that both Cerberus and Daimler will spin the story into a way that attempts to shape the story this series of missteps between both companies over the past decade into anything but the blunders they are, but it’s probably in the best interests of both parties to conclude the divorce proceedings once and for all.
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