Daimler Gives Chrysler to Cerberus

How eager was Daimler to unload its nine-year investment? Eager enough to throw in an extra $675 million to sweeten the deal

by Gail Edmondson

Editor's note: This is an updated version of a previously published story.

The final bill came due on May 14 for Daimler-Benz' ill-fated 1998 takeover of Chrysler. After nine years of management agony and billions of dollars in losses, DaimlerChrysler (DCX) cut a deal that actually pumps a net $675 million into Chrysler as a sweetener for private equity group Cerberus Capital Management to take over the ailing Chrysler unit and its $18 billion in estimated health and pension liabilities.

DaimlerChrysler announced Cerberus will pay $7.4 billion for 80.1% of Chrysler, but as part of the deal, the German auto maker is injecting slightly more than that sum to cover Chrysler's outstanding debt and restructuring charges and recapitalize the weakened U.S. automaker. "Daimler actually paid a dowry to unload Chrysler—it took a hit on its balance sheet. That speaks volumes about the future they saw for Chrysler under their stewardship," says Garel Rhys, professor of motor industry economics at Cardiff University in Wales (see BusinessWeek.com, 4/18/07, "DaimlerChrysler: End of an Unhappy Pair?").

News of the Chrysler sale was followed on May 15 by the automaker's first-quarter earnings report, which included a $2 billion loss at Chrysler—far worse than expected. Fortunately, strong gains at other business units, including the Mercedes Car Group and commercial vehicles, more than offset Chrysler's red ink. DaimlerChrysler reported that its first-quarter net profit jumped 250%, to $2.66 billion, thanks in part to a cost reduction program begun two years ago at Mercedes.

Seeking an upbeat way to characterize the divorce, DaimlerChrysler Chairman Dieter Zetsche called it "a new start" for both Daimler and Chrysler. Daimler has spent more than 15 years grappling with the costly legacy of misguided acquisitions and alliances. Many of them were part of the "World Inc." strategy of former CEO Jüergen Schrempp. Chrysler was Schrempp's most costly debacle: He paid $36 billion for the No. 3 U.S. automaker shortly before the losses erupted, calling the deal "a marriage made in heaven."

Catching Up

But if Chrysler's future is a question mark, Daimler's is the answer to many a shareholder's fervent wish—a return to the company's core luxury-car tradition. Analysts see the sale of Chrysler as more a leap backward for Daimler than a fresh start. The split returns Daimler to its status of the early 1990s—prior to unsuccessful acquisition binges—as a maker of luxury cars and trucks. Shrunken and chastened, DaimlerChrysler will rename itself Daimler AG. "It's back to square one," says Rhys. "They've showed they are vulnerable. Daimler's confidence has taken a hit."

Zetsche's task now is to hone top profits and regain some of the market share lost to premium rivals BMW and Audi. "We will be the leading maker of premium vehicles worldwide, and we will pursue a culture of top performance," Zetsche said. While Daimler was struggling to fix Chrysler and Mitsubishi Motors, BMW invested heavily in a raft of hot new premium models, surpassing Mercedes in global sales in 2005. Audi is also making incursions (see BusinessWeek.com, 7/10/06, "Audi: Revving to New Gains").