Daimler to Sell Off Chrysler for $7.4 Billion

DaimlerChrysler announced today that it would be selling 80.1% of the Chrysler Group to Cerberus Capital Management, a private equity firm. Daimler paid over $36 billion in 1998 for Chrysler, but Cerberus Capital will only pay $7.4 billion if the deal is approved. However, the private equity group is taking on a large risk because of billions of dollars in retiree pensions and health care costs that will be retained by Chrysler.

When Daimler-Benz and Chrysler merged in 1998, there was much hope that the two automakers would become a global leader in their markets. However, the changes in the North American market to smaller, fuel-efficient cars, clashes in corporate cultures, and grave mistakes in corporate strategy caused the promising marriage to end quickly. Chrysler has suffered large financial losses, including $1.5 billion last year alone and has plans to lay off over 13,000 jobs in the future. The Mercedes-Benz brand has also suffered in terms of quality and reliability over the last ten years.

Daimler Chrysler AG will retain 19.9% equity interest in Chrysler and continue to work with its North American counterpart on drive systems, and other products and services outside North America. The deal should be completed by the third quarter of 2007 and shareholders will be asked to approve a change of name to Daimler AG.

According to DaimlerChysler's website, "Chrysler Holding LLC will hold 100% each of the future Chrysler Corporation LLC, which produces and sells Chrysler, Dodge and Jeep® vehicles, and the future Chrysler Financial Services LLC, which provides financial services for these vehicles in the NAFTA region."

Former U.S. Treasury Secretary, John W. Snow chairs Cerberus, which holds significant interests in a variety of companies worldwide whose combined annual revenues equal over $60 billion. Last year Cerberus lead a consortium of investors, including Citibank Inc. and Aozora Bank, to buy GMAC (General Motors Acceptance Corp.) for $14 billion. It is expected that Cerberus will combine GMAC and Chrysler Financial Services operations.

Earlier in the year Ron Gettelfinger, President of the United Autoworkers (UAW) warned that a private equity group would strip and sell off Chrysler in pieces. However he now responds to the proposed deal in a more positive light, "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made. Because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group."

Dr. Dieter Zetsche, Chairman of the Board of Management of DaimlerChrysler AG and Head of the Mercedes Car Group was quoted on the DaimlerChysler's website, "We're confident that we've found the solution that will create the greatest overall value - both for Daimler and Chrysler. With this transaction, we have created the right conditions for a new start for Chrysler and Daimler... We (Daimler) will be the leading manufacturer of premium vehicles and a provider of premium services in every market segment we serve worldwide."

Finally John W. Snow, Chairman of Cerberus Capital Management had this to say about the upcoming buyout, "We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler. Cerberus believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry. Most importantly, we believe in Chrysler. We would like to thank DaimlerChrysler for their good stewardship of this American icon over the last decade. We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome. A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations."