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  After the Split: Is Daimler Vulnerable to a Hostile Takeover?

After the Split Is Daimler Vulnerable to a Hostile Takeover?

By Dietmar Hawranek

Part 2: A Difficult Future for the Global Conglomerate

The future looks considerably less rosy for the remains of the former global conglomerate. Schrempp's successor, current CEO Dieter Zetsche, put on a show of optimism when he announced the Chrysler sale in Stuttgart, together with John Snow, the head of Cerberus, and Chrysler CEO Tom LaSorda. But upon closer inspection, it becomes clear that difficult times are ahead for both Chrysler and Daimler. The sale of the American automaker marks the beginning of a completely new phase in an already tough competitive situation in the global auto industry.

Until now, mergers and acquisitions were kept within the family -- of automakers, that is. GM bought and then sold a stake in Fiat, and BMW acquired Rover. Porsche is preparing to assume the management of the VW Group. But now, for the first time, a major automotive corporation will be run by the kinds of private equity firms that in the past had only invested in automotive supply companies.

Cerberus, the company that is acquiring Chrysler, developed its business in 1992 by buying distressed companies. The company's name comes from Greek mythology and represents a three-headed hellhound that once guarded the gate to the underworld. Other players within the pack of private equity firms will likely interpret the Chrysler deal as a signal to attack.

The only companies in the industry that can consider themselves safe against such action are those still largely in family hands, such as Porsche, BMW, Toyota and Peugeot. But from now on even these companies will have to pay closer attention to profitability, otherwise their owners could be tempted to sell their shares to financial investors. This places even more pressure on the management and employees of automobile companies.

Chrysler Needs New Partner

Chrysler plans to cut 13,000 jobs with its current restructuring program, a number that is unlikely to increase under the new owners. Nevertheless, life will become even less pleasant for Chrysler's workforce in the future. Even now, the company continues to pay decent pensions and it picks up the healthcare costs of its workers -- even retired ones. The United Auto Workers Union (UAW) refused to renegotiate its wage agreement with Chrysler, which was concluded during better days, as it had done with General Motors and Ford. The UAW argued that unlike the other two major US automakers, which are both deep in the red, DaimlerChrysler, as a combined corporation, is still raking in billions in earnings.

But now UAW will have to negotiate, because Cerberus refuses to accept its old excuse. Chrysler employees can expect to see cutbacks. But even these cost-cutting measures will not mean that the future of the spun-off US automaker is secure. In the long run, Chrysler will need a new partner to supply it with platforms and engines for fuel-saving cars.

Company executives believe that Cerberus plans to make Chrysler profitable once again and then sell the company to another automaker in Asia or Eastern Europe.

Gloomy Days for Daimler

Things are no less gloomy on the German side. The remaining portion of the company, Daimler AG, could easily become a target for private equity firms, despite CEO Zetsche's assurances that the risk of a takeover by financial investors has in fact declined for his company. "We have greater and better control over our fate now than we did half a year ago," he said.

At that time, there was indeed a significant risk that a so-called " locust" would descend on DaimlerChrysler. The group's market value had dropped to less than €50 billion. It would have been easy for a hedge fund to acquire a larger share package and force management to separate the company from Chrysler. Analysts believed that if that had happened the company could have been worth €80 to €85 billion -- a potential goldmine for a financial investor.

The divorce from Chrysler makes sense for Mercedes-Benz. The two parts of the joint company were too different. But Zetsche's decision apparently came under pressure. He took the step an attacking investor would have forced him to take -- and in doing so planned to prevent precisely such a takeover.

Nevertheless, the danger has by no means passed. The remaining company, Daimler AG, is somewhat overvalued at about €65 billion. But according to analysts, the company has net cash reserves in excess of €12 billion, making it attractive to financial investors.

A hedge fund would only have to acquire a blocking minority, which would cost about €20 billion and provide it with decisive influence over company management. It could then force management to distribute the cash reserves to shareholders.

So far all of these scenarios are nothing but speculation. Nevertheless, DaimlerChrysler Chief Financial Officer Bodo Uebber takes the risk seriously. He is trying to convince the company's largest shareholder, Kuwait, which owns 7.1 percent of shares, to increase its stake. Perhaps Uebber will have to take the drastic step of distributing the cash reserves through a special dividend -- essentially a preventive measure to reduce the company's attractiveness to financial investors.

Even before the two companies finally go their separate ways, it is already clear that the divorce will be difficult for Mercedes-Benz. The Stuttgart-based company will face tough competition from Audi, BMW and Lexus, Toyota's luxury brand.

These three companies have the benefit of stable ownership. This means that they can afford to invest heavily in research into alternative engines, even if the innovation isn't ready for use until many years down the road. But at Mercedes-Benz profitability must now be the company's supreme corporate goal. This could mean, for example, that Mercedes-Benz will refrain from developing models that are less likely to turn a strong profit.

Management hasn't come up with a strategy yet on how to enable Mercedes-Benz to survive in this new era, but it plans to address the issue soon. For now, however, Zetsche plans to enjoy the separation from Chrysler. "We are very, very pleased," he said.