Daimler and Deutsche Bank: What's Going On?


At first glance, it seemed like the kind of announcement Deutsche Bank CEO Rolf Breuer would be pleased to make. On Feb. 1, he declared at a news conference that Germany's largest industrial company, DaimlerChrysler, had retained Deutsche Bank for advice on how to defend itself against a hostile takeover bid.

This looked like a coup for Deutsche Bank, which has been trying with limited success to break into the highly lucrative merger-and-acquisition advisory business. What better advertisement could it have than to be hired by DaimlerChrysler? After all, the carmaker normally turns to Goldman Sachs, the world's premier investment bank, for strategic advice.

But it turns out there might have been more to Breuer's announcement than met the eye. The implication was the auto giant feels vulnerable -- a huge embarrassment for a furious Jürgen Schrempp, DaimlerChrysler's CEO. Daimler officials quickly called Breuer's remarks "unwise." Just days before, Daimler board member Manfred Bischoff had said management didn't believe anyone would make a bid for the company, which is the world's third-largest auto maker. In late January, Breuer said he, too, didn't see a serious threat but added: "DaimlerChrysler's low share price can give people ideas."

A TOYOTA TARGET? So what gives? Deutsche Bank isn't just an adviser -- with a 12% stake, it's also Daimler's biggest shareholder. Up to now, it has stood solidly behind Schrempp and his ambitious global strategy, even as Daimler's share price has slumped to a four-year low. And it now appears that Breuer's comments may have been a signal that the bank's patience with the slumping auto giant is wearing thin.

Indeed, Daimler's capitalization has sunk so much that some analysts speculate it could conceivably be bought by Japan's mighty Toyota, which has $124 billion in equity. Toyota denies any interest in buying part or all of Daimler, and many analysts, too, dismiss such talk. "Toyota has the resources to do such a deal, but it has always been on its own, building on its own strengths," says Metzler Bank analyst Jürgen Pieper.

Still, Deutsche Bank clearly isn't happy with the way things are going. The bank's own share price has been negatively affected by Daimler's problems. Today once-mighty Daimler-Benz, the division that used to be the stand-alone company, is worth some $46 billion, less than before Schrempp orchestrated the $36 billion acquisition of the now-troubled Chrysler Corp. (see BW Online, "Chrysler: On a Collision Course with Dealers"). And even if Toyota isn't interested, others could be eyeing DaimlerChrysler. Its prize asset is the venerable and profitable Mercedes-Benz luxury car business. The brand alone is worth $34 billion, according to Mercedes chief Jgen Hubbert.

ZERO RESERVES.?Is a takeover likely? Probably not right now. Even the hardiest raider would have trouble pulling off such a huge deal. Daimler's stock is so undervalued relative to the company's assets that investors would demand 40% to 50% more than the current share price of around $48. And, at this stage, its key shareholders don't look inclined to sell. Deutsche Bank had previously ruled out selling its Daimler stake before 2002, when Germany's punishing capital gains taxes are reduced to zero.

But Schrempp's grand plan for DaimlerChrysler, which includes acquiring stakes in Japan's ailing Mitsubishi Motors and in South Korea's Hyundai Motors, may be at risk. The strategy has already stretched Daimler's management to the breaking point and depleted its reserves to zero. Goldman and JP Morgan -- the company's other bank advisers -- envision the sale of Chrysler as one possible solution. That would repudiate Schrempp's entire strategy.

According to the German newspaper Welt am Sonntag, Schrempp offered to resign last November. But the head of DaimlerChrysler's supervisory board, Hilmar Kopper, told him to stay and fix the company. Kopper, who has signed off on every one of Schrempp's deals, said in December that he had full confidence in Schrempp and his team. "I see how hard they're working," he said.

ADDED PRESSURE. Kopper also happens to be chairman of Deutsche Bank's supervisory board. So Breuer's comments have led to speculation of a rift between him and Kopper, who was his predecessor as Deutsche CEO. Relations between the two have been strained since March, when Breuer's ambitious plan to acquire rival Dresdner Bank fell apart. Kopper is said to think Breuer's comments about Daimler were unwise, jeopardizing client confidentiality and possibly emboldening others to make a bid.

But the fact that Deutsche now appears ambivalent about Daimler's fate adds to the pressure on Schrempp. Certainly, other investors have expressed their unhappiness. Kirk Kerkorian is suing Schrempp and Kopper over the DaimlerChrysler merger, and in January the American sold half his 3.3% stake. Daimler lost a quarter of its market value last year as countless others just walked away.

For troubled DaimlerChrysler, boasts such as Breuer's can have several meanings these days. By Christine Tierney and David Fairlamb in Frankfurt


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