After the Split Is Daimler Vulnerable to a Hostile Takeover?

The split between Daimler and Chrysler marks the beginning of a new era in the automobile industry, which has become vulnerable to the attacks of private equity investors for the first time. It's a threat that also menaces top brands like Mercedes.

Mercedes production at a Daimler factory in Sindelfingen, Germany near Stuttgart

Mercedes production at a Daimler factory in Sindelfingen, Germany near Stuttgart

Former CEO Jürgen Schrempp is perhaps the only person who could possibly be pleased over the DaimlerChrysler debacle. Schrempp, once celebrated as the architect of a DaimlerChrysler global conglomerate, ought to be a defeated man today. Indeed, he is widely ridiculed as the personification of mismanagement and as someone who has frittered away billions. Any legacy Schrempp might have had was destroyed once and for all last Monday when his successor, Dieter Zetsche, decided to break up the company and sell Chrysler to Cerberus, a private equity firm.

But anyone who encountered Schrempp last week as he was riding the glass-enclosed elevator to his office on the thirteenth floor of Mercedes-Benz's Munich office would have seen a happy, relaxed, semi-retired man. The 62-year-old Schrempp's good spirits were probably due in part to the fact that he still has plenty to do. He serves on the boards of directors at Vodafone, luxury goods manufacturer Richemont and an energy company, and he is an advisor to the South African president.

DaimlerChrysler is still paying for his office, secretary and an office manager who, conveniently enough, happens to be Schrempp's wife Lydia, who apparently takes home an annual salary of about €200,000 ($269,000) for her services.

Schrempp deserves reproach for all of this. How is it that someone who led a company into such a deep crisis deserves this kind of treatment? But Schrempp can only smirk at these kinds of accusations. The amounts in question are paltry sums compared to what he has made -- and still stands to make -- as a result of the merger with Chrysler.

The new world of stock options

In the year in which the merger deal was reached, Schrempp's salary jumped from an estimated €1.8 million ($2.42 million) to €4.5 million. More important, he received stock options that are now worth a fortune.

This form of compensation has become more common in Germany, especially after the merger between Daimler-Benz and Chrysler. It entitles executives to acquire stock at a predetermined price. Any rise in the price of that stock is pure profit.

Between 2000 and 2004, DaimlerChrysler's senior executives were entitled to receive up to 14.4 million of these options. If Schrempp, as head of the company, had received only 10 percent of that total, he would have more than 1 million options today, costing him an average price of €45 a share. The price of DaimlerChrysler stock was at €64 late last week. If Schrempp were to sell 1 million options, he would stand to collect a profit of just under €20 million.

No one other than Schrempp, and possibly his wife, knows exactly how many options he owns. One of the peculiarities of this compensation system is that while the actual salaries of senior executives are usually disclosed, the details of many stock option programs remain secret.

Not surprisingly, Schrempp has declined to comment on the issue. Hamburg business professor Michael Adams voices his concern that the former auto executive only received the options at such a low subscription price "because he drove the company into the ground." Schrempp, says Adams, can only stand to benefit if his successor manages to bring the stock price back up to its former level. The upshot, according to Adams, is that Schrempp "has become a rich man."


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