Schrempp's visionary Chrysler deal lost $12.6bn for Daimler investors

Published May 18, 2007

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Juergen Schrempp, the architect of the $36 billion (R252 billion) takeover of Chrysler by Daimler-Benz, may have few equals in German business.

The firm he created, once considered visionary, lost $12.6 billion in market value in the nine years after the merger. DaimlerChrysler shares have fallen 15 percent since November 17 1998, the day the combined company started trading.

Its Frankfurt-listed shares peaked half a year after the merger and never recovered, while competitor BMW's value has more than doubled in the past nine years.

"Schrempp was certainly the biggest destroyer of capital in Daimler's history and most likely in the history of corporate Germany," says Juergen Graesslin, the head of the DaimlerChrysler Critical Shareholders Association.

Schrempp left as chief executive at the end of 2005, two years before his contract expired.

Dieter Zetsche, his successor as chief executive of the German-US car maker, announced the sale of a majority stake in Chrysler this week, ending Schrempp's plan to create a global vehicle empire by bringing Mercedes sedans together with Dodge trucks.

Private equity firm Cerberus Capital Management bought an 80.1 percent stake for $7.4 billion.

The shares rose as much as 7.8 percent on Monday, their biggest intraday gain since July 28 2005, the day that Schrempp announced his resignation, when the stock climbed more than 11 percent.

The merger is an example of how hefty capital "can be destroyed in a very short time in a merger like this", says Juergen Kurz, a spokesperson for DSW, Germany's oldest and largest association for private investors, including shareholders of DaimlerChrysler.

"It's rather late and very expensive - it cost shareholders a lot of money - but at least it's gone now."

The former chief executive could not be reached for comment. He is a director at Sasol, Vodafone and Richemont.

DaimlerChrysler reported that the US unit made a first-quarter loss before interest and tax of e1.5 billion (R14.25 billion) due to job cuts and a factory closing. Group pre tax earnings came in at e2.04 billion, comfortably beating analyst estimates. Previous figures are not comparable because of an accounting change.

Since 1998 Chrysler has posted annual profits of about $5 billion and losses almost as large.

A $680 million deficit last year was the third loss since Lee Iacocca saved the vehicle maker from bankruptcy 25 years ago.

Zetsche said Chrysler had contributed a total of e11 billion to operating profit for DaimlerChrysler since the merger. He led Chrysler for five years until September 2005, and backed the Michigan-based unit as recently as early February.

A week later he said: "All options are on the table. We obviously overestimated the potential of the synergies. I don't know if any due diligence could have shown us this, given the very different nature of the markets we are working in, between the mass market and the premium segments."

His Valentine's Day announcement attracted suitors ranging from buyout firms to investor Kirk Kerkorian, rival US vehicle maker General Motors and car-parts supplier Magna International.

The chief executive attributed the failure of the merger to limits on cost savings and technology sharing. US car buyers were unable to pay for "premium" technology in Chrysler vehicles supplied by Mercedes, Zetsche said.

"Companies always try to tell investors that mergers are going to work and that this time it will be different," says Peter Braendle, a fund manager at Swisscanto in Zurich. "It was no different at Daimler. It didn't work."

Chrysler and Mercedes failed to keep pace with Japan's Toyota and Honda in vehicle quality. Mercedes ranks as the industry's worst performer in the annual car issue of Consumer Reports magazine. Several of Chrysler's cars had the lowest scores among new models.

After the sale, DaimlerChrysler will be left with Mercedes, a heavy truck division, a financing arm, a commercial van unit and investments such as a stake in European Aeronautic, Defence & Space.

Revenue from those divisions was about e100 billion last year.

Chrysler's latest financial woes surfaced last year as US average petrol prices reached $3 a gallon (R5.60 a litre) for the second consecutive summer. Drivers shunned big cars and 4x4s in favour of smaller, more fuel efficient vehicles.

As demand fell, Chrysler failed to cut production fast enough. Its inventory of vehicles unassigned to dealers exceeded 100 000, forcing Chrysler to boost discounts.

United Auto Workers president Ron Gettelfinger says he hopes Chrysler will stay within the "DaimlerChrysler family".

The union has vowed to work with any new owner to protect jobs. "It's time for all of us to get this behind us," Gettelfinger says of the sale process. "We're going to close that chapter."

After DaimlerChrysler posted a e662 million loss in 2001, shareholders began calling for Schrempp to shed Chrysler and resign.

The firm also had crises at its truck division, its Smart car unit and Mercedes. Under Schrempp's decade-long stewardship, DaimlerChrysler was supposed to become a dominant manufacturer in the world's major markets.

Former Chrysler chairman Robert Eaton called the product portfolio of the group "unparalleled" when the merger was struck, and said DaimlerChrysler would become "the strongest automotive and transportation company in the world." Instead, the firm posted losses at Chrysler and unsuccessfully attempted alliances with Japan's Mitsubishi and South Korea's Hyundai.

Zetsche was tapped to return from the US unit to lead DaimlerChrysler and restructure Mercedes when Schrempp announced his retirement. Months after taking over the parent, Zetsche resisted pressure to jettison Chrysler. He even appeared in an advertising campaign last year that touted its ties to its German parent.

"Chrysler only cost money," says Gottfried Gruber, a DaimlerChrysler worker in Stuttgart who monitors the quality of engine parts delivered by suppliers.

"There were certainly no expressions of sympathy among staff" about the sale, he says. Morale "will now improve". - Bloomberg

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