Daimler Gives Chrysler Away For Free

For once, someone has listened to my advice. After years of imploring Daimler to dump Chrysler, my voice was heard and Daimler has passed control to Cerebus Capital Management, one of those private equity companies with billions in cash unknown outside the investment community.

Cerebus, of course, paid nothing: This is a fair, given that Chrysler was worth less than nothing to Daimler but potentially something to Cerebus. Forget about the announced $7.4 billion  payment. It hides the real figures just to make the Daimler people not look like they were complete fools for having bought Chrysler. In the end, this was bartering a la Adam Smith.

The failed DC merger-takeover embodies just about every reason strategists as so skeptical of mergers. Two allegedly complementary product lines (Mercedes big luxury cars; Chrysler everything else), two complementary markets (America and Europe) were supposed to be the basis for synergies as well. DC sold the idea that a company could be much larger, much more complex and much more efficent all at the same time. In short, core incompatibilities and incompetencies would produce nuclear fusion.

Why such foolishness? On Daimler's part, management showed a lack of confidence in Mercedes's business model and were unable to come up with a convincing strategy story that did not include become a "world AG" with partners in America and Asia. It is worth nothing that Mercedes's alliances with Mitsubishi and Hyundai also failed. As for Chrysler, former CEO Eaton sold the company with the satisfaction that America's eternal number 3 had been merged (remember, they called it a merger) with Europe's number 1, for which he received a very very large goodbye paycheck.

Now that this fiasco is over, what can we expect? Cerebus will cut costs in ways that Daimler could not, and if they get lucky their essentially 0 investment may bring them real money. Ever better yet, if they save Chrysler, they may even get to be called heroes, which would be a real change for the private equity world.

As for Daimler, they have kept 19.9% of Chrysler. Since they gave the rest away for free, they thought they might as well keep a piece just in case Cerebus turns the company around. That way they could finally turn a profit on Chrysler. Stranger things have happened.

Comments

[gurus]

As auto business use to be cyclical, Cerebus just has to cut cost and wait for an improvement on the business to turn it public again, winning a nice check.